Moscow Starts to Shape Sanctions Response

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Moscow is still to reveal its retaliation package in response to sanctions against Russia. But statements from the Kremlin and the foreign ministry indicate it will not include limitations on gas exports.

At the same time, there are clear signals that companies from "unfriendly countries" that are withdrawing from Russia completely — including BP and Shell — may not be compensated for their assets, and could lose the chance of ever returning.

According to the foreign ministry, the work on how to react to sanctions is being carried out "in all directions" and the measures would be "sensitive."

Shortly after the US announced a ban on imports of Russian crude oil, refined petroleum products and LNG, Moscow said President Vladimir Putin had signed a decree barring or limiting the export and import of some products and raw materials. The list of the banned products is to be released by the government by Mar. 11.

In a sign that no limitations would be imposed on gas exports, the foreign ministry said on Mar. 9 that Moscow "is not refusing from its position of a reliable supplier of gas to Europe."

Deputy Prime Minister Alexander Novak warned on Mar. 7 that Moscow could halt supplies via the 55 billion cubic meter per year Nord Stream 1 pipeline and reroute Russian energy sources to other destinations.

"Following the unfounded accusations of Russia regarding the energy crisis in Europe and the introduction of a ban on Nord Stream 2, we have every right to take a mirror decision and impose an embargo on gas transportation through the Nord Stream 1 gas pipeline, which is 100% loaded today," Novak said in a televised statement.

This was the first official confirmation that Moscow is weighing all options in response to sanctions.

"So far we have not made this decision," Novak said, because nobody would benefit from it. But he emphasized that "European politicians are pushing us towards this decision through their statements and accusations against Russia."

Banning gas exports would be a painful decision for Moscow as they remain one of its few sources of hard currency.

Three Options

Moscow has outlined three options for international companies in Russia: They can continue to operate; transfer their holdings to be managed by their Russian partners and reclaim them later; or make a full exit, closing down operations and firing employees. Moscow said it would treat the last option as voluntary bankruptcy.

The United Russia political party that has the majority of seats in the lower house of the Russian parliament, the State Duma, has initiated the nationalization of assets of foreign firms leaving the country. The plan is being discussed by the government which has reportedly approved the mechanisms of such a move. It remains unclear how the nationalization plans would impact the Russian assets of those international majors that announced their intention to exit.

Shell issued a statement this week saying it will end all involvement with Russia’s oil and gas sector, following its earlier announced intention to exit its joint ventures with Gazprom, including its 27.5% stake in the Sakhalin-2 LNG facility and its 50% stake in the Salym Petroleum Development and Gydan ventures with Gazprom Neft.

BP on top of its decision to divest its 19.75% in Rosneft and stakes in joint ventures with the Russian state-controlled major, has been avoiding Russian crude in the spot market as well.

At the same time, China is considering buying or increasing stakes in Russian energy and commodities companies, according to Bloomberg, while Moscow plans to use 1 trillion rubles ($9.5 billion) from Russia's rainy day National Welfare Fund to purchase shares of Russian companies from the market, in another form of renationalization.

Saving Private Partners

Russian privately owned companies, including Lukoil and Novatek, have issued cautiously worded statements in support of negotiations and diplomacy for the resolution of the "tragic situation" in Ukraine. The companies are eager not to alienate their foreign partners. TotalEnergies remains a 19.4% shareholder in Novatek and is a partner in the Russian gas producer's Yamal LNG and Arctic LNG 2 projects.

Lukoil has the most extensive international operations and overseas partnerships among all Russian oil majors. It has upstream projects in various countries, where it works with partners such as BP, Shell, Exxon Mobil, OMV and Inpex.

Its board has also included several foreigners, including former Austrian Chancellor Wolfgang Schussel, who announced his resignation last week and condemned Russia's invasion of Ukraine.

About 55% of Lukoil's shares are in free float and traded on exchanges in Moscow, London and Frankfurt, as well as the OTC market in the US. The remaining shares are held by the company's management. Western sanctions have not been put on Lukoil President Vagit Alekperov or Novatek CEO Leonid Mikhelson.

Gas Supply, Sanctions, Corporate Strategy
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