New US sanctions put pressure on Russian economy, limited risk to energy sector

Moscow — New US sanctions against Russia that include a potential ban on dollar transactions involving state banks may accelerate Russia's efforts to switch to other currencies in international trading, while no immediate impact on oil and gas production levels is likely, market players and analysts said.

The Russian ruble fell to its lowest against the dollar since August 2016, exceeding Rb66/$1, after the US announced new sanctions against Russia late Wednesday.

The latest sanctions come as the US-Russia relationship continues to deteriorate. Driven by concerns over Russia's alleged meddling in US elections, and President Donald Trump's reluctance to take a hard line on Russia, US legislators have proposed several new sanctions bills that could hit the Russian economy and the energy sector specifically.

Under the Chemical and Biological Weapons Control and Warfare Elimination Act (CBW Act), the US plans to ban the sale of dual-purpose technology to Russia from around August 22, in response to Russia's alleged involvement in the poisoning in the UK of double agent Sergei Skripal and his daughter.

A second, more punishing round that includes "petroleum or any petroleum product" may come into force in three months, if Russia fails to meet certain conditions.

These sanctions are unlikely to have any noticeable impact on Russian oil producers as they supply only limited volumes of oil directly to the US.

A bigger impact is expected on the economy in general as any loans and exports of goods and technology excluding food and other agricultural products could be banned.

Another bill introduced in mid-July, dubbed the Secure America from Russian Interference Act of 2018, could harm the Russian energy sector much more, if approved, analysts believe.

ALTERNATIVE CURRENCIES

It would restrict investment into energy projects with Russian state-run companies and dollar transactions with several major Russian banks, among other measures.

The act may block imports of all technology used in the oil sector. But the full impact is difficult to forecast at this stage, analysts said.

"It is unlikely to impact production levels in general, as oil companies are likely to find alternative technology and equipment, or produce it domestically, as we've seen recently when 2014 sanctions blocked transfer of equipment to certain projects," said Andrei Polischuk from Raiffeisen Bank. "But oil recovery rates may drop [in the longer term]."

"It would only impact oil production in the long term if Europe supported those sanctions, although sanctions in general will of course have a negative effect on future production prospects," Mikhail Sheibe, an analyst at Sberbank CIB said. "Refiners could also experience some difficulties, as it may make maintenance more complicated and protracted."

Ironically, some analysts predict that oil producers could see benefits from the new sanctions due to weakening of the ruble as their earnings are mainly in dollars and costs in rubles.

"Oil companies are doing well, their profits are growing," Denis Poryvayev, a finance analyst at Raiffeisen, said.

If the US blocks dollar transactions for some Russian banks, oil and gas exporters could just redirect their currency flows via non-sanctioned banks, he said.

"It is the Russian banking system in general and ordinary people who will suffer significantly," he added.

These sanctions may accelerate the process of switching away from dollar-denominated trading, Novatek CEO Leonid Mikhelson said.

MARKET IMPACT

"This has been discussed for a while with Russia's largest trading partners such as India and China. Even Arab countries are starting to think about it... If they do create difficulties for our Russian banks, all we have to do is replace [dollars]," he added.

The trade war between the US and China will only accelerate the process, he said.

In 2014, state-run Gazprom Neft tested trading of crude cargoes in Yuan and Rubles, in trading with China and Europe, to reduce Russia's dependence on crude trading in dollars, in response to initial western sanctions against Russia's energy sector.

The idea of conducting mutual trades in national currencies has also been discussed within the BRICS -- Brazil, Russia, India, China, South Africa -- emerging economies grouping, although many analysts doubt the idea will be widely implemented, at least in the near future.

The Russian energy ministry was cautious in its comments on the latest US sanctions. Deputy minister Alexei Teksler said they were "carefully" studying all US bills related to Russia and analyzing potential consequences.

The ministry hopes European companies will not support new sanctions.

"These attempts to influence the market by non-competitive means are very harmful," Teksler said.

"Any attempt to significantly limit our capabilities will seriously affect the market. We have serious doubts that consumers of our energy resources are interested in that," he added.

Russia was the only country "capable of supplying gas at a normal price" during freezing temperatures in Europe this winter, and Russian LNG even went to the US, he said.

--Nadia Rodova, nadia.rodova@spglobal.com

--Nastassia Astrasheuskaya, nastia.astrasheuska@spglobal.com

--Rosemary Griffin, rosemary.griffin@spglobal.com

--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com