Russian Reliance on Chinese Loans May Blunt the Impact of U.S. Sanctions

MOSCOW — With the latest round of sanctions against Russia, the United States Treasury Department said it had “increased the cost of economic isolation for key Russian firms,” like the state oil company Rosneft and the banking arm of the natural gas giant Gazprom.

The isolation, though, does not extend to the companies’ growing reliance on Chinese lending, a trend in the Russian natural resources industry that will blunt the effect of sanctions aimed at the finances of Russian oil companies.

Energy companies form the backbone of the Russian economy. If oil and gas are taken together, they export more energy than Saudi Arabia, and that money props up the military of President Vladimir V. Putin. Rosneft is the world’s largest publicly traded oil company, pumping about 4.1 million barrels daily.

Given the gigantic outlays for drilling wells and building pipelines in the Siberian wilderness, such companies rely deeply on cheap sources of capital. The Chinese have been willing to oblige.

“We absolutely don’t expect any impact on the operations or finances of Rosneft or Novatek,” another Russian energy company hit with sanctions on Wednesday, said Pavel Kushnir, an oil and gas analyst at Deutsche Bank in Russia.

“There is a possibility the Chinese banks will try to increase the cost of financing to take advantage of the situation, but this is just speculation,” he said. “I think it will have no impact.”

The sanctions were so narrowly focused that some financial analysts in Moscow saw them as largely symbolic. The broader significance, they say, was mostly an implied threat of broader measures to come, should the crisis drag on.

“What is most important is the sentiment,” said Vladimir Tikhomirov, chief economist with BCS Financial Group, a Moscow brokerage firm. “If the situation doesn’t improve around Ukraine, which doesn’t seem very likely, there could be another sanction. That will affect risk premium around all new debt issues.”

The third round of sanctions did cross a new line by focusing on large publicly traded enterprises in major sectors of the Russian economy. The latest measures prohibit American banks and investors from proffering loans with a maturation of more than 90 days to four Russian companies — Rosneft, Novatek, Gazprombank and VEB, the state foreign trade bank.

The move weighed broadly on Russian stocks. Shares in Rosneft were down 4.3 percent. The Russian Micex, which had climbed back from its losses after the first round of sanctions in March, was off 2.6 percent.

And the fallout could prove substantial for some on the new list. Among the eight military industrial companies banned from doing business with Americans was the Kalashnikov Concern, the maker of AK assault rifles and their civilian variants, called Saigas, which are popular in the United States. In recent years, about 30 percent of the factory’s output has been sold in the United States, the world’s largest civilian gun market.

The Kalashnikov factory’s parent company, Rostec, issued a statement lamenting the sanctions’ “negative effect on cooperation between a number of Russian and American companies, and threat to tear apart the common trust.”

While the latest sanctions are not likely to inflict deep pain, Rosneft and other Russian energy companies may have to get more creative about their financing needs. China, for one, has proved a good source of funds in the past.

Rosneft has repeatedly turned to Chinese lending during periods of tension with the West including taking a $6 billion loan from the Chinese in 2005 to buy Yukos assets. At the end of the first quarter this year, Rosneft reported $41 billion in commercial debt owed to mostly Western banks and $25 billion in funds received as prepayment for future oil deliveries, of which analysts estimate about $20 billion is Chinese financing.

Rosneft has not disclosed details of the Chinese prepayment agreement, or its upper limit. But Mr. Kushnir, the Deutsche Bank analyst, noted that last fall Rosneft retired some Western bank debt with prepayment funds most likely from Chinese sources, suggesting the terms are at least competitive with commercial loans.

During a state visit of Mr. Putin to China in May, Novatek, the other energy company placed under sanctions on Wednesday, secured Chinese financing to build a liquefied natural gas plant at Sabetta on the Yamal Peninsula in the Arctic Ocean, intended to supply Asian markets by crossing thawing Arctic shipping lanes. During that visit, Gazprom also negotiated a prepayment for future sales to China.

If sanctions widen, though, Rosneft and others may find their position more challenging.

Rosneft, Mr. Tikhomirov said, will inevitably pay higher rates if European banks follow the cue from the United States and the company is eventually cut off from the dollar bond market, the most liquid globally.

That could complicate a number of Rosneft’s major projects in the works, like plans to drill in the Arctic, and to buy Morgan Stanley’s oil unit. “It will have to manage its balance by either cutting costs, or deciding not to pursue projects,” Mr. Tikhomirov said.