Sanctions could pinch Russia's energy sector

 

The sanctions imposed on Russia could hurt crucial energy projects in the country by increasing borrowing costs, according to a new report from IHS Global.

The U.S. and the European Union (EU) placed economic sanctions on Russia earlier this month in retaliation for President Vladimir Putin's military interference in Ukraine. The financial penalties have created uncertainty for projects like a $17 billion pipeline that would carry gas from Russia to Europe, the research firm said.

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"While the sanctions so far do not impose any direct restrictions on the Russian energy sector, they undermine investor confidence, impeding Moscow’s efforts to generate economic growth through expanded investment," said Julia Nanay, an analyst with IHS Global.

The current sanctions on Russia, and the threat of further ones, have rattled the global market. Big-ticket items including gas pipelines, liquified natural gas projects and offshore exploration are in jeopardy, according to IHS.

"Sanctions have come at a time when Russian oil and gas companies are implementing major projects of considerable importance to state economic goals," Nanay said. "Even if the current sanctions do not directly target any specific company in the oil and gas sector, they can still affect the pace of development of many of these projects."

The Ukraine conflict has raised questions about whether Russian oil-and-gas companies have the necessary access to capital.

After spending $38 billion to support the ruble, Russia's currency, the country's central bank raised interest rates from 1.5 percent to 7 percent this month. That move makes borrowing money for high-priced energy projects more expensive.

International sanctions could further weaken the ruble, Nanay said, resulting in "negative momentum" for Russia's economy.

On top of that, Russia's credit rating took a hit when agencies like Fitch and S&P downgraded the country's credit rating to "negative," again making it difficult for companies to find backing for their large projects, the report said.

A targeted strike by the U.S. and Europe with sanctions on the energy sector would be devastating to Russia, as more than half of the funds in its annual budget comes from the industry, according to IHS.

The House and Senate on Thursday approved legislation providing financial aid to Ukraine and gave President Obama room to impose stricter sanctions against Russia on Thursday, but both bills left the energy industry untouched.