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Falling Oil Prices Force Russia to Shelve Rosneft Projects

Squeezed by EU Sanctions, Rift Over Ukraine

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Growing pressure on Russian government resources as oil prices slide to six-year lows has prompted Economy Minister Alexei Ulyukayev to announce that the government will not fund four out of five Rosneft projects. The Russian oil major had requested financing from the country’s sovereign wealth fund for those projects.

“They were many requests for funds from the sovereign fund,” Slava Smolyaninov, a strategist at BCS, a brokerage firm in Moscow, told New Europe by phone on August 26. “But it appears most of the resources have been committed already so in that respect companies do find it more and more difficult to get additional money.”

Lots of other Russian companies want access to the €65 billion fund because they have been squeezed by the fall of the ruble and face growing difficulties in accessing western markets, following Western sanctions against Russia for the annexation of Crimea and its role in Eastern Ukraine.

“One thing is the Russian sanctions but the other thing, very important, is actually the economic situation in a sense that Russia like Brazil, for example, remains in a recession,” Smolyaninov said, adding that there are no signs that Russia will emerge from recession anytime soon.

In that respect Russian companies do not require more financing because their projects are going to be postponed because there is no demand, he said. Moreover, the cost of funding and priorities for the government have shifted from development into survival so it makes sense that the government has turned down the requests from Rosneft, Smolyaninov said.

Ulyukayev told journalists during a visit to Malaysia that “there is a decision” not to provide funds from the National Welfare Fund to four Rosneft projects. The Russian government’s decision is a blow to Rosneft’s ambitious plans of doubling its oil and gas production within 20 years.

In 2014, Rosneft asked for more than $40 billion in support from the NWF, but later trimmed its request to just five projects requiring 301 billion rubles ($4.3 billion) of state financing.

Rosneft can still be looking for funding through international partnerships. However, Smolyaninov told New Europe that for most of the Russian companies the Western markets remain closed, especially for Rosneft.

The ruble on August 24 slid 2.3% to more than 70 per dollar. Moreover, low oil prices are undermining the economics of some of Rosneft’s projects and western sanctions complicate Rosneft’s ability to finance them. Rosneft CEO Igor Sechin said earlier in August that it would shift its focus to increasing production at existing fields.

“The government and financial authorities in Russia and in other emerging markets are feeling increasingly nervous about their national currencies depreciating rapidly,” the BCS analyst said. However, Smolyaninov added that Russia has been in that difficult situation for more than a year already and in a way it is better accustomed than some of the other emerging markets.

The decision not to finance Rosneft’s projects also comes at a time of uncertainty in Moscow after the replacement of Russian Railways chief Vladimir Yakunin, an ally of Russian President Vladimir Putin, triggered expectations of a broader reshuffle among the Russian elites, including Sechin.

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

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