Rosneft Takes On Record Debt As U.S. Sanctions Weigh

By Tsvetana Paraskova 

Russia’s state-held oil behemoth Rosneft has heavily borrowed on its domestic bond market this year to fund oil projects and refinance earlier debt, as it’s cut off from U.S. and Western capital markets.

Now that new sanctions on Russia and some Russian energy projects are looming, Rosneft has tapped local bond markets for its highest borrowing in one year on record—the equivalent of $17 billion (1 trillion Russian rubles).  

Rosneft has been on the U.S. list of sanctioned entities since 2014, as has its head Igor Sechin, a close ally of Vladimir Putin.  

But the U.S. is now studying additional sanctions—including on energy projects—that could further restrict Rosneft’s room for fundraising.

According to Bloomberg calculations, the total amount of Rosneft’s bond issues this year is more than the bonds issued in 2015 and 2016 combined.

Last Friday was the latest bond issue for Rosneft, when the oil giant issued two series of 10-year bonds of $5.1 billion (300 billion rubles) each, for a total of $10.2 billion (600 billion rubles), setting the coupon at 8.35 percent. The lower borrowing costs for Russian companies this year have helped Rosneft to price the coupon on its latest ruble notes at around one percentage point lower than similar bonds issued last year, Bloomberg notes.

Rosneft will use the proceeds from the latest bond issue to finance oil and gas projects and to refinance existing debt at lower rates, the company told Bloomberg in an emailed statement.

However, Rosneft and other Russian firms may face lower liquidity among local investors, if the U.S. sanctioned Russian sovereign debt, restricting foreign investors’ access to Russian treasury bonds.

Russia’s central bank expects short-term volatility if the U.S. slaps sanctions on Russian bonds, according to the bank’s first deputy governor Ksenia Yudayeva. But economists surveyed by Bloomberg expect borrowing costs to spike in case of such sanction.

If more local investors buy Russian sovereign debt, then liquidity available to Rosneft and other state-held companies may decline, says Bloomberg.

So it’s no surprise that Rosneft has borrowed a trillion of rubles on its domestic bond market—all the more so that borrowing costs have dropped lately, allowing it to refinance earlier debts with money borrowed at lower rates.

Bloomberg data shows that Rosneft still has to repay $3.6 billion on its dollar bonds that it had issued before the sanctions, with one $1.1-billion bond repayment due in March next year.  

Meanwhile, some representatives of the Russian business elite or people close to the Kremlin are keeping a low profile and are being careful to avoid being seen with Vladimir Putin, for fear that they may end up on a U.S. blacklist, according to sources in those circles who have spoken to Reuters. Although a list would not automatically mean sanctions, some people are anxious because the consequences and the criteria for being blacklisted are unclear, sources tell Reuters.

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