Igor Sechin’s oil company to receive new, preferential treatment which might hit the Russian economy where it hurts

Rosneft’s new privilege may become one of the drivers of a new fall in the rouble, which is already threatened by U.S. sanctions

What happened

Vladimir Putin signed a law (Russian) changing the requirements for repatriating foreign currency revenues to Russia for major exporters hit by sanctions. In reality, there is only one such exporter in Russia — state-owned Rosneft, whose hard currency operations already played a role when the rouble fell by 30% at the end of 2014. Rosneft’s new privilege may become one of the drivers of a new fall in the rouble, which is already threatened by U.S. sanctions.

The government required major exporters to transfer export revenues to accounts in Russian banks at the end of 2014, in order to stop the rouble’s sharp fall. While the law still hasn’t been passed, Vladimir Putin also personally called (Russian) the largest companies asking them to sell foreign currency. Rosneft’s foreign currency operations were at the time suspected to be one of the reasons for the rouble fall, which caused a panic among Russians.

Now, lifting the requirement to repatriate foreign currency revenues should help the company which, because of sanctions, cannot access long-term credit from western banks. But if now Rosneft decides to leave its foreign currency revenues ($64 billion in 2017) abroad, this would be bad news for the Russian market: the currency deficit will grow, and this would threaten the rouble.

The special treatment for Rosneft might hurt the rouble, which is already in a risky place. All proposed new sanctions against Russia which are being discussed in U.S. Congress include a ban on the purchase of Russian sovereign debt. If the U.S. only bans investors from participating in new offerings of Russian sovereign debt, this would already lead to a 5% fall in the rouble. A ban on all operations with Russian sovereign bonds would bring the rouble down by 15%, according to Citi estimates. The draft sanctions legislation shared yesterday by Senators Lindsey Graham and Bob Menendez includes the lighter version.

Why the world should care

If you invest in the Russian market, this is a good reminder that beyond U.S. sanctions, there are a number of other, unpredictable risk factors for the entire Russian economy, including successful lobbying by the heads of state-owned companies who also happen to be Vladimir Putin’s close friends.

Peter Mironenko