Russian Energy Giants’ Credit Outlooks Lowered by S&P

Standard & Poor’s cut the credit outlooks for Russia’s largest energy companies amid concern international sanctions may cripple the central government.

The outlooks for OAO Gazprom (OGZD), OAO Rosneft (ROSN), OAO Transneft and OAO Lukoil (LKOD) were lowered to negative from stable today, six days after the New York-based credit-rating service downgraded the outlook for the Russian Federation. S&P cited the companies’ “very strong links” with the government and said geopolitical developments may hinder Russia’s ability to support them.

The ratings for Gazprom, Rosneft and Transneft are based on “timely and sufficient extraordinary government support” and Lukoil “would be unlikely to withstand” a Russian default, S&P said in a note to clients today. “If we lowered the ratings on Russia, we would lower the ratings on Gazprom, Rosneft, Transneft, and Lukoil.”

The U.S. and European Union slapped Russian and Ukrainian officials with financial sanctions and travel bans in response to Russian President Vladimir Putin’s seizure of the Crimea peninsula from Ukraine. Western powers have said they are considering even stiffer penalties should the crisis escalate.

“While the sanctions so far do not impose any direct restrictions on the Russian energy sector, they undermine investor confidence, impeding Moscow’s efforts to generate economic growth through expanded investment,” Julia Nanay, Russia and Caspian energy analyst for IHS Inc., said in a note to clients today.

Currency Impact

The dispute with Ukraine and resulting sanctions also have lowered the value of the ruble, weakening Russia’s ability to revive economic growth, and may make it harder for Russian companies to obtain financing for large projects such as pipelines and offshore platforms, Nanay said.

Tougher sanctions against the Russian government and domestic companies “could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance,” S&P said in its March 20 note on the government’s credit outlook.

Even before the Ukraine crisis erupted last month, economic growth in Russia had slowed to 1.3 percent in 2013, the weakest annual rate since 2009, S&P said in its note. The company said Russia’s economy would continue to slow through the end of this year, creating “significant downside risk.”

Gazprom, Rosneft and Transneft are majority-owned by the Russian government. Lukoil’s largest individual shareholder is its billionaire chief executive officer, Vagit Alekperov.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Tina Davis, Jasmina Kelemen

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