Ruble Freefall Helps to Shield Russia’s Most Important Industry – Businessweek

Posted: Tuesday, December 16, 2014

The freefall ruble that symbolizes Russia’s
economic crisis is also shielding its most important industry.

Russian oil and gas companies are benefiting from earning
dollars from sales of their products, while paying for expenses
in rubles that have lost about half their value against the U.S.
currency in the past five months.

Still, the energy companies whose revenues brought power
and status on the world’s stage to President Vladimir Putin are
battling collapsing crude prices, hurdles to borrowing and
sanctions imposed by the U.S. and Europe over the Ukraine
conflict. Set against the short-term gains from the ruble’s
slide is a recessionary backdrop that’s driving down stocks of
all Russian commodity businesses, and raising concerns that
oilfield exploration and development will be hindered.

“The devaluation of the ruble under the same oil price is
actually positive for all exporters, including oil companies,”
said Alexey Bulgakov, a Sberbank CIB fixed-income analyst.

The differences between Russia’s situation now and in 1998
are greater than the parallels so far. The central bank’s action
today to raise benchmark rates to 17 percent from 10.5 percent
compares with a tripling to 150 percent on May 27, 1998. Still,
if Putin is unable to protect the energy industry that he made
the centerpiece of his administration, or the revenue he wielded
for domestic and foreign-policy ends, all bets may be off.

Projects Doubtful

The producers, in addition to gaining from a weaker ruble,
can also thank a tax system that partly pegs charges for energy
companies to the oil market, reducing rates paid as prices fall.

“In the current spooky economic environment, with falling
crude oil prices, oil companies are more or less protected,”
said Alexander Kornilov, an energy analyst at Alfa Bank. There’s
“ruble devaluation which helps them as exporters, and a
taxation regime that assumes the burden” of falling prices, he

Benchmark Brent crude is down about 50 percent since a high
it reached on July 19 to $60.02 a barrel by 7:20 p.m. in London.
The ruble sank to a record today, losing as much as 19 percent.

Any salve from the currency’s slide and lower taxes will
turn to poison for the Russian energy companies as market
turmoil continues. The RTS Oil & Gas Index of leading Russian
energy producers denominated in dollars fell 11 percent today.

“Most of the oil producers in Russia have foreign currency
debt which results in an enormous foreign-exchange loss effect
dragging down their earnings,” Kornilov said. “The oil price
drop makes some crude oil greenfield projects doubtful.”

Adding to the pressure on developments are the sanctions
imposed by the U.S. and its allies over Russia’s support for a
separatist insurgency in Ukraine. In one example of many, Exxon
Mobil Corp. and OAO Rosneft (ROSN) terminated contracts for service
vessels operated by Norway’s Siem Offshore Inc. and Rem Offshore
ASA as the sanctions upend plans to explore the Russian Arctic.

“We will probably see some projects being delayed or put
on hold,” said Maxim Edelson, a ratings analyst at Fitch.
“Western capital markets may remain closed to Russia’s largest
oil producers for a long time. They are feeling the pain of
sanctions through a lack of access to debt markets, they are re-assessing new projects as we speak.”

To contact the reporters on this story:
Stephen Bierman in Moscow at;
Elena Mazneva in Moscow at

To contact the editors responsible for this story:
Will Kennedy at
Tony Barrett, Randall Hackley


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