Russia's authorities took urgent steps on Monday to try to counter the effects of wide-ranging sanctions approved by the US, the European Union and its allies against the country's banks, corporations and individuals in response to the Russia's invasion of Ukraine.
In an effort to support the Russian ruble - whose value has dropped by 30% against the US dollar over the past weekend - authorities have decided to oblige exporters of oil, gas and other commodities to sell 80% of their foreign currency revenues and buy rubles as soon as payments from foreign buyers arrive in their accounts in Russia.
The measure is effective immediately, with oil and gas producers affected as they have been receiving higher revenues in the last several months following the recovery of oil prices across the globe.
According to Mikhail Krutikhin, managing partner at Moscow-based consultancy RusEnergy, the requirement will lead to extra costs for country’s producers.
They will have to re-purchase foreign currency on the volatile market to pay for imported foreign-made equipment and technologies, he said.
Krutikhin also expects the cost of imported oilfield equipment, including those made in China, to rise for Russian producers as sanctions will prevent their direct import.
He predicts Russian oil production will start posting a decline in 2023, or possibly earlier, even though the sanctions do not directly target Russian oil and gas production and exports.
Chairman of the Russian Central Bank, Elvira Nabiullina, acknowledged during a televised meeting on Monday that the bank is unable to regulate ruble fluctuations by selling US dollars because the US Treasury has frozen its assets in the US.
Rate more than double
In addition, the Central Bank has more than doubled its annual re-financing interest rate to 20% from 28 February.
The Bank said in a statement that the measure is set to trigger an increase in interest rates across Russia's banking system to “offset increased devaluation and inflation risks”.
However, the move is also expected to negatively impact borrowing costs for Russian producers as they have been increasingly reliant on raising financing from domestic banks and investors following earlier curbs on foreign financing.
These curbs were introduced by the US and Europe in 2014 in response to the Russian annexation of the Crimea Peninsula from Ukraine and Russia's alleged support of pro-Russian separatists in the Donetsk and Luhansk regions in the east of Ukraine.
According to Russian oil producer Gazprom Neft's 2021 financial report, some 53% of its total debt was denominated in rubles, with just 30% held in US dollars.
Meanwhile, in 2015, US dollars accounted for a 73% share in the Gazprom Neft’s total debt, with just 11% of this debt consisting of ruble-denominated loans.
Leonid Mikhelson, executive board chairman of Russian largest independent gas producer Novatek, has repeatedly complained about the high cost of domestic borrowing even before today’s doubling of the refinancing rate.
Novatek cannot access western capital because of the 2014 sanctions.
Three trains of Novatek’s second large liquefied natural gas project, Arctic LNG 2, rely predominately on imported high-tech equipment whose manufacture and delivery to Russia may now be negatively impacted.
Although Russia's Central Bank has prohibited stock exchanges in Moscow and St Petersburg from trading equities today, Novatek shares on the London Stock Exchange plunged by almost 67% on Monday, while Gazprom's share price was down about 22% at press time.
Gazprom stock has been propped up by reports of increasing Russian gas flows to Europe as buyers on the continent sought additional supplies in anticipation that the war in Ukraine will eventually hit the country’s transit capacity.
- 'Tragedy:' LetterOne billionaire owner Fridman speaks out against 'bloodshed' in Ukraine
- Germany to accelerate LNG imports, reduce dependence on Russian gas
- Russia unlikely to divert to China gas meant for Europe amid war crisis, say analysts
- Biden announces new US sanctions on Russia in wake of Ukraine invasion
- Johnson calls on West to end dependence on Russian oil and gas, and threatens ‘massive’ sanctions