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Summary

Renaissance Capital

20 June 2019

Russian oil & gas

The 16 March 2014 referendum in Crimea, which led to a change in its legal status and its acceptance into the Russian Federation, prompted a negative reaction from the US, the EU and other countries that do not recognise the referendum in Crimea as legal. As a result of these events and the ongoing crisis in Eastern Ukraine, the US, the EU and other countries have imposed sanctions on a number of entities, including companies and individuals. The list of sanctions has consistently expanded since 2014 by adding more sanctioned entities and individuals to existing sanctions as well as by imposing new sanctions as a result of alleged other unfriendly actions by the Russian Federation, including its alleged interference with the US presidential elections in 2016 and the poison attack on Russia’s ex-spy Sergei Skripal in the UK. As of the date of this report, the full number of anti-Russia sanctions imposed by the US and the EU since 2014 amounts to 74 and covers a significant number of legal entities and individuals. There are also other sanctions, in addition to these 74, that have been imposed by other countries.

Currently, these sanctions include prohibitions on particular dealings in the equity and/or debt of a number of Russian banks and companies, bans on supplies of certain equipment, technology and related services, and freezing the funds and other assets of, imposing travel restrictions on, and prohibiting transactions with, the sanctioned individuals and companies.

These sanctions have already had a negative effect on the Russian economy and the state of the affected oil & gas companies. There is no indication on when the sanctions may be lifted, and a a US law known as the Countering America’s Adversaries Through

Sanctions Act, adopted on 2 August 2017, significantly complicates the prospects of their lifting or softening. We discussed the impact of potential new sanctions on the Russian economic growth in the 5 September 2018 report Russia: The land of contrasts.

Over the five years since, the US and the EU have coordinated their sanctions policies; it is therefore not surprising that they are remarkably similar. Generally, there is a high level of consistency between the sanctions and trade controls to include a similar approach to: asset freezes; controls on financing directed at the oil, gas, energy and defence industries; restrictions on access to capital markets; controls on goods and services for the Russian military and other military end-users in Russia; and controls on certain dual use items.

However, there continue to be some differences between the two approaches, including variations in the entities subject to sanctions, differences on the controls applicable to imports and investments in infrastructure, and how the specific prohibitions are implemented or lifted. We summarise the existing sanctions in Figure 137 and discuss the country-specific approaches below.

Sanctions have been in place since 2014

Coordinated policies by the US and the EU

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Renaissance Capital

20 June 2019

Russian Oil & Gas

Figure 137: Summary of international sanctions affecting Russian oil & gas companies

	US			EU		Canada
Administered by OFAC		Administered by BIS
Directive 2	Directive 4		Sectoral sanctions	Direct sanctions	Direct sanctions	Sectoral sanctions

Restrictions	Restrictions on transacting	Prohibition on the provision,	A licence requirement for the	It is prohibited to provide, directly	The direct or indirect purchase or	It is prohibited for any person in	It is prohibited for any person in
	in, providing financing for,	exportation, or reexportation of	export to Russia of certain items if	or indirectly, the associated	sale of, the direct or indirect	Canada and any Canadian	Canada and any Canadian outside
	or otherwise dealing in new	goods, services (except for	the exporter, re-exporter or	services necessary for deepwater	provision of investment services	outside Canada to transact in,	Canada to export, sell, supply or
	debt of longer than 60 days'	financial services), or technology	transferrer knows that the item	oil exploration and production,	for, or assistance in the issuance	provide financing for or otherwise	ship any good wherever situated,
	maturity for persons in the	by US persons or from the US in	“will be used directly or indirectly	Arctic oil exploration and	of, or any other dealing with	deal in new debt of longer than 90	to Russia or to any person in
	energy sector determined to	support of exploration or	in exploration for, or production of,	production, or shale oil projects in	bonds, equity or similar financial	days’ maturity, including bonds,	Russia for use in offshore oil
	be subject to this directive,	production for deepwater, Arctic	oil or gas in Russian deepwater	Russia.	instrument with a maturity	loans, debentures, extensions of	exploration or production at a
	their property or their	offshore or shale projects that	(greater than 500 feet) or Arctic		exceeding 30 days.	credit, loan guarantees, letters of	depth greater than 500 metres, oil
	interests in property.	have the potential to produce oil	offshore locations or shale			credit, bank drafts, bankers’	exploration or production in the
		anywhere in the world where the	formations in Russia", or is unable			acceptances, discount notes,	Arctic or shale oil exploration or
		interest of the designated entities	to determine whether the item will			Treasury bills, commercial paper	production.
		exceeds 33%.	be used in such projects.			and other similar instruments.
Duration	Indefinitely. Easing the sanctions requires a decision by the US Congress.			Extended every six months (expire if not extended) by the European		Remain in place until lifted by the Canadian government.
				Council. A unanimous vote is necessary for extension. The latest
				extension, until 31 June 2019, occurred on 21 December 2018.
Rosneft
Gazprom
Gazprom Neft
LUKOIL
Surgutneftegas
NOVATEK
Tatneft
Bashneft*
Transneft
Note: Bashneft is not mentioned separately but is effectively included as it is more than 50% controlled by Rosneft.
							Source: Renaissance Capital

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US sanctions

The US sanctions on Russia are focused on the financial services, energy, and defence industries. The sanctions contain a variety of targeted prohibitions that have increasingly expanded the scope of the sanctions programme. As applied to the oil & gas sector, the sanctions generally include designating or blocking certain Russian individuals and entities; limiting the availability of debt or equity financing; prohibiting the provision of goods, services and technology in support of certain activities relating to the exploration or production of oil or gas in Russia, or owned by the sanctioned entities abroad; and restrictions on the supply of certain items for use in oil or gas exploration or production in Russia, including Arctic offshore or shale formations.

The sanctions include both economic measures administered by Office of Foreign Assets Control (OFAC) and export controls administered by the US Department of Commerce Bureau of Industry and Security (BIS).

The current status of these controls is addressed in more detail below:

▪OFAC Sanctions. On 16 July 2014 and 12 September 2014, OFAC issued a series of Directives imposing targeted sanctions upon key elements of the Russian economy. Each Directive governs activities between US persons and those persons listed on the Sectoral Sanctions Identifications (SSI) List. The SSI List is organised according to the four Directives. Unlike the Specially Designated Nationals (SDN) List5, which includes blocked persons and prohibits substantially all activity with so-called SDNs, the SSI List designations result in prohibitions that are limited to those activities targeted by the Directives. Specific prohibitions include:

1.Transacting in, providing financing for, or otherwise dealing in new debt of longer than 30 days' maturity or new equity of persons in the financial services sector determined to be subject to this directive, their property, or their interests in property (Directive 1).

2.Transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days’ maturity for persons in the energy sector determined to be subject to this directive, their property, or their interests in property (Directive 2).

3.Transacting in, providing financing for, or otherwise dealing in new debt of longer than 30 days maturity of persons in the defence and related materiel sector determined to be subject to this directive, their property, or their interests in property (Directive 3).

4.Providing, exporting, or re-exporting, directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime areas claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to this directive, its property, or its interests in property (Directive 4).

−As of the date of this report, OFAC designated:

o Almost all major Russian financial institutions, such as Gazprombank, Vnesheconombank, VTB Bank, Bank of Moscow,

5 In relation to the Russian oil and gas sector, the SDN list includes Igor Sechin, CEO of Rosneft, Alexei Miller, CEO of Gazprom, Vladimir Bogdanov, CEO of Surgutneftegaz, and Gennady Timchenko, a 23% shareholder in NOVATEK

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Rosselkhozbank and Sberbank, including their 50%+ subsidiaries, under Directive 1.

oRosneft, NOVATEK, Gazprom Neft and Transneft, including several specific singled out subsidiaries of Rosneft, NOVATEK and Transneft, under Directive 2.

o State Corporation Rostec under Directive 3.

oGazprom, Gazprom Neft, Rosneft, LUKOIL and Surgutneftegas, including their 50%+ subsidiaries, pursuant to Directive 4.

▪Commercial and Dual-Use Controls (the Export Administration Regulations). On 6 August 2014, the BIS amended the Export Administration Regulations (EAR) to include the Russian Industry Sector Sanctions as section

746.5.These sanctions impose a licence requirement for the export to Russia of certain items if the exporter, re-exporter, or transferrer knows that the item “will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia”, or is unable to determine whether the item will be used in such projects. In September 2014, the BIS added five Russian energy companies, including Rosneft, Gazprom, Gazprom Neft, LUKOIL and Surgutneftegas to its Entity List. In August 2015, the BIS also added Gazprom’s Yuzhno-Kirinskoye field to its Entity List as a deepwater field that, according to the BIS, has significant oil reserves. In 2016, the list was augmented to include 15 specifically named Rosneft subsidiaries and 51 specifically named Gazprom subsidiaries.

On 2 August 2017, US President Donald Trump signed into law a bill known as the

Countering America’s Adversaries Through Sanctions Act. Signing the bill enshrined preexisting US sanctions into law – easing them now requires the agreement of the US Congress. Such sanctions can take a long time to repeal: we note that the Jackson-Vanik amendment was on the statute books from 1974 until 2012. The bill further tightened slightly some of the existing sanctions; added more sanctions related to cybersecurity and corrupt privatisations; authorised sanctions on state railway and metals & mining companies; widened sanctions on shale/offshore/Arctic drilling to cover international projects (although US companies will be able to work on projects outside of Russia that are less than one-third Russian-owned); and allowed (although not imposed) sanctions on pipeline investments (but only in coordination with EU allies).

EU sanctions

The EU began imposing sanctions in March 2014 and introduced a largely similar list of persons subject to EU sanctions. The EU sanctions fall under two categories, sectoral and direct:

▪The sectoral sanctions do not allow for the provision, directly or indirectly, of the associated services necessary for deepwater oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia, and therefore theoretically affect all Russian oil producers.

▪Direct sanctions prohibit the direct or indirect purchase or sale of, the direct or indirect provision of investment services for, or assistance in the issuance of, or any other dealing with bonds, equity, or similar financial instrument with a maturity exceeding 30 days. These sanctions specifically apply to Rosneft,

Renaissance Capital

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Russian oil & gas

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Renaissance Capital 20 June 2019

Russian oil & gas

Gazprom Neft and Transneft (Bashneft is not on the list but is effectively sanctioned as well as it is controlled by Rosneft).

EU sanctions require extension every six months by unanimous vote of the European

Council. The most recent extension took place on 21 December 2018 and is valid until 31

July 2019.

Sanctions by Canada and other countries

Canada has introduced economic sanctions targeting a number of former Ukrainian government officials, Russian government officials, Russian businessmen, Russian companies and banks and other persons. The list of such persons designated under Canadian sanctions legislation is largely similar to the list of persons designated in the US and the EU. The designations in Canada were introduced in March 2014, under the authority of the Special Economic Measures (Russia) Regulations, the Special Economic Measures (Ukraine) Regulations, and the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations, and were subsequently expanded several times in 2014 and 2015. The current list includes Rosneft (and Bashneft by association), Gazprom, Gazprom Neft, Surgutneftegas, NOVATEK and Transneft. The list also includes 118 Russian individuals, the most relevant of whom in terms of direct exposure to the Russian oil & gas sector are Igor Sechin, CEO of Rosneft, and Gennady Timchenko, a 23% shareholder in NOVATEK.

Canada has also introduced sanctions against companies operating within specific sectors of the Russian economy, including, among others, financial services and energy sectors. Specifically, it prohibits for any person in Canada and any Canadian outside Canada to export, sell, supply or ship any good wherever situated, to Russia or to any person in Russia for use in offshore oil exploration or production at a depth greater than 500 metres, oil exploration or production in the Arctic or shale oil exploration or production. As such, these sanctions theoretically affect all Russian oil producers.

In November 2017, Canada also designated certain Russian nationals under the Justice for Victims of Corrupt Foreign Officials Regulations.

Australia, Norway, Switzerland, Japan, Ukraine and certain other countries have also imposed similar sanctions on various Russian individuals and companies but we believe their impact on the Russian oil & gas sector is less significant compared with the sanctions imposed by the US and the EU.

Other sanctions

The only other Russian oil and gas company exposed to sanctions and not mentioned previously to our knowledge is NNK, which was included in the SDN list by OFAC on 1 June 2017, for its alleged dealings with North Korea. According to imposed sanctions, US persons are restricted from dealings with NNK, and the company's US assets are subject to blockage.

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