Putin Energy Champions Pay Crimea Toll in Market: Russia Credit

Russia’s biggest energy companies are being punished in the bond market on bets their state ties expose them to sanctions.

The yield on OAO Gazprom’s dollar bonds due in July 2022 rose 72 basis points this month to 6.12 percent yesterday. That’s triple the 23 basis-point increase for emerging-market oil and gas companies in JPMorgan Chase & Co.’s CEMBI Broad Index. The yield on OAO Rosneft’s dollar debt due March 2022 climbed 87 basis points in the period to 6.39 percent.

The prospect of tougher Western penalties as Russia absorbs the Crimean peninsula has shut companies out of foreign credit markets, Moody’s Investors Service said yesterday. Gazprom and Rosneft are “most exposed” as they’re state-controlled and because energy companies have become “particularly” vulnerable to sanctions risk, Barclays Plc said in a March 17 note, before U.S. President Barack Obama expanded sanctions on Russian officials yesterday.

“Gazprom is one of the most sensitive companies to the Ukraine crisis,” Konstantin Nemnov, who helps manage $3 billion at TKB BNP Paribas Investment Partners in St. Petersburg, said by phone three days ago. “From the standpoint of the importance of the energy sector for the Russian budget and economy, this could be the most significant target for sanctions.”

Economic Sanctions

Investors are reconsidering their investments in Russia after President Vladimir Putin’s intervention in Ukraine’s Crimea region at the start of March. Standard & Poor’s lowered its outlook for the sovereign’s BBB credit rating to negative from stable yesterday, citing “heightened geopolitical risk” and potential economic sanctions hitting its economy.

Yields surged before the Black Sea peninsula’s residents voted March 16 to join Russia in a referendum the U.S. and European Union don’t recognize. The EU and the U.S. applied travel restrictions and asset freezes to a list of Russian officials the day after the poll. Obama widened the reach of the sanctions yesterday and authorized the introduction of penalties that would target the Russian economy.

Rosneft must pay down debts of 728 billion rubles ($20 billion) this year, the company said in a website presentation last month. At the end of the third quarter last year, Gazprom had 374 billion rubles in loans and bonds due by the end of September 2014, 85 percent of which were denominated in foreign currencies, according to Fitch Ratings.

Closed Markets

“Rosneft has elevated external refinancing needs and high leverage,” Barclays analyst Stella Cridge said in the note. “Gazprom relies on Ukraine as a key transit route for gas sales to its most profitable market, Europe, and is the largest market issuer.” Cridge declined further comment by e-mail yesterday.

Rosneft “has sufficient and diversified sources for timely servicing” of its debt, the company’s press service said by e-mail yesterday. Gazprom’s spokesman Sergei Kupriyanov declined to comment by text message yesterday.

“International public capital markets at the moment are all but closed for corporates in Russia and the Commonwealth of Independent States, and only the mere fear of sanctions has done that,” Denis Perevezentsev, an analyst at Moody’s in Moscow, said by e-mail on March 20. “For those corporates, which rely on public international capital markets, this might have negative implications if the situation is not resolved.”

The yields on dollar bonds from OAO Novatek, the country’s largest independent natural-gas producer, and OAO Lukoil, Russia’s biggest privately-owned oil producer, have also climbed this month.

China Option

Lukoil won’t cancel a possible Eurobond sale because it has no information on risks that might change its plans, Interfax reported yesterday, citing Chief Executive Officer Vagit Alekperov. It hired Citigroup Inc. and JPMorgan for a sale, a person with knowledge of the offering said March 6, asking not to be identified because he isn’t authorized to speak publicly.

Gazprom would be driven to seek financing from Russian state banks or Chinese lenders if sanctions are applied to transactions with Russian companies, Maxim Edelson, an analyst at Fitch, said by e-mail March 18.

Gazprom is rated the same as the Russian government at BBB by Fitch, its second-lowest investment grade. Crude and natural gas provide 50 percent of Russia’s budget revenue and the country supplies about 30 percent of Europe’s gas.

The yield on the government’s April 2020 dollar bond climbed six basis points, or 0.06 percentage point, to 4.66 percent at 6:13 p.m. in Moscow today. The extra yield on Russia’s dollar debt over Treasuries rose nine basis points to 316, according to JPMorgan Chase & Co. indexes.

Russia’s incursion into Ukraine and continuing military movements carry “dangerous risks of escalation,” Obama said in Washington yesterday. He also signed an executive order authorizing, though not implementing, economic sanctions affecting parts of the Russian economy, which he didn’t specify.

Gazprom and Rosneft “are state-owned companies so they’re more likely to fall under sanctions,” Yulia Bushueva, who helps manage about $500 million at Arbat Capital in Moscow, said by e-mail.

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