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Company Overview

Rosneft is a Russian integrated energy company specializing in the prospecting, exploration, extraction, refinement and sale of petroleum, natural gas and related products. Rosneft operates within two primary business segments: Exploration & Production and Refining & Sales. Rosneft is the largest oil and gas company in Russia and one of the largest holders of hydrocarbon reserves and producers of hydrocarbon liquids in the world. In 2017, Rosneft had approximately 6% market share of global oil production, 41% of Russian oil production, and 36% of Russian oil refining.

Within Exploration and Production, Rosneft seeks to acquire first-class asset projects with low reserve replacement costs and long-term resource potential. After discovery comes production, where Rosneft seeks to augment a competitive advantage through development and use of advanced technology, oilfield services, and strategic partnerships. Rosneft’s gas production is driven by the growth in its portfolio of long-term contracts. Oil refining takes place primarily domestically in Russia but also abroad, as Rosneft uses its vertical integration, a geographically diversified portfolio, and extensive upgrade program to its refineries. After refining, Rosneft sells its oil, petroleum, and gas products both abroad and in Russia through wholesale and retail channels.

Rosneft’s CEO is Igor Sechin, a key member of Vladimir Putin’s inner circle. The Chairman of the Board is Gerhard Schroeder, the former German Chancellor. In July 2006, Rosneft carried out a listing of Global Depositary Receipts (GDRs) on the London Stock Exchange, with each GDR equivalent to one common share of Rosneft trading under the ticker ROSN:LI. As of September 1, 2018, there were 677 million GDRs outstanding, 6.4% of total shares. Rosneft’s market capitalization is approximately $75B. The Russian government owns just over half the company through the holding company JSC ROSNEFTEGAZ. British Petroleum (BP) owns 19.75% of Rosneft, QH Oil Investments LLC (Qatar QIA fund) owns approximately 19%, with the remaining shares free floating.

Source: Rosneft Investor Relations

Source: Rosneft Investor Relations

Key Operating and Financial Results

2017 revenue growth increased by 20.6% year-over-year in RUB terms to RUB 6 trillion (approximately $90 billion), driven by new asset integration, positive macroeconomic tailwinds, improved sales mix, expanded trading activity, and faster growth in domestic oil and oil products supplies. 2017 EBITDA increased by 9.8% vs. 2016 in RUB terms to RUB 1.4 trillion, and 24.4% year-over-year in USD to $24 billion, driven by realizing synergies from the integration of acquired assets, a positive contribution from global joint development projects, and strong cost controls, partially offset by an increased tax burden. Rosneft also benefited from increased market share in Russia, Asia, and Europe, and the strengthening of refining and selling operations. Net income for the year grew by 27.6% in RUB and by 40.7% in USD to RUB 222 billion and $3.8 billion.

Source: Rosneft 2018 Annual Report

Source: Rosneft 2018 Annual Report

The company maintained hydrocarbon production efficiency, with operating expenses coming in at $3/BOE (barrel of oil equivalent) during the year. Daily hydrocarbon production growth was 6.5% year-over-year. Capital expenditures for the fiscal year were up 30% year-over-year to RUB 922 billion (approximately $13.8 billion), driven by increased investment in drilling at Brownfields (Yuganskneftegaz, Samotlorneftegaz), new upstream project development, otherwise known as Greenfields (Vankor, Rospan, Taas-Yuryah and Russkoe field), and the acquisition of Russian upstream assets and participation in joint international projects. Free cash flow for 2017 came in at RUB 245 billion ($4.1 billion). The Board of Directors approved an increase in the minimum dividend payout ratio from 35% to 50% of IFRS net income, and the annual dividend payment to shareholders was RUB 104 billion, including RUB 63.4 billion from 2016 and RUB 40.6 billion for 1H’17.

Source: Rosneft 2018 Annual Report

Source: Rosneft 2018 Annual Report

Rosneft entered new markets in Egypt and India, accelerating the company’s international growth and share of global commodity markets. Other notable events for Rosneft during 2017 were gas production start at the Zohr field and the acquisition of a stake in Essar Oil. At the end of 2017, Rosneft’s Board approved the Rosneft 2022 strategy, laying out its strategic focus for the next five years and beyond.

The increase in oil prices has been a tailwind for Rosneft, with Brent crude oil trading at approximately $75/barrel as of October 2018, up approximately 30% for the year. Higher price levels are expected to support the current OPEC agreement to maintain a quota limiting production. Rosneft management predicts the price of oil to be between $75-80/barrel by the end of 2018.

Rosneft Strategy

Earlier this year, Rosneft announced its new Rosneft 2022 strategy focused on increasing profitability, completing key projects, and transforming the company’s technological capability. Within upstream oil, Rosneft’s long-term goals are to increase total liquid hydrocarbon production by >2% annually, from 225 mmt in 2017 to 250 mmt in 2022, and to double production of hard-to-recover reserves from 16.3 mmt in 2017 to approximately 33 mmt in 2022. Upstream strategic objectives and priorities include maintaining a 100% liquid hydrocarbon reserve replacement ratio along with organic growth, decreasing non-productive time through more efficient service, and reducing operating expenditures by 2-3% annually. Within gas, Rosneft wants to more than triple gas EBITDA growth rate by 2022, while increasing gas production from 68 bcm in 2017 to >100 bcm by 2022. Gas strategic objectives and priorities include developing major gas production projects including Rospan and Kharampur, improving the cost efficiency of gas sales in Russia, and monetizing gas reserves within the Far East and Eastern Siberia.

Within its refining and petrochemicals business, Rosneft’s long-term goals are 55% motor fuels production growth and 2-3x EBITDA growth by 2022. Strategic objectives include profitability growth through the completion of ongoing refinery development projects, construction of major petrochemical greenfield projects, and increasing use of automation and robots to improve efficiency. In downstream selling, logistics, and retail, Rosneft’s long-term goals are to grow share of related goods and services in the gross margin of its retail business, from 9% in 2017 to 16% in 2022 and 20% long-term, along with 1.5-2x growth in the segment by 2022. Commerce and logistics strategic priorities include improving cost efficiency and expansion and diversification of sales channels. Retail priorities include promoting strong brands and high service standards at filling stations, expanding non-fuel businesses, and develop customer service package at filling stations.

Source: Rosneft 2018 Annual Report

Source: Rosneft 2018 Annual Report

Economic Trends

Rosneft’s operating performance in 2017 was heavily impacted by Russian economic conditions, global oil prices, and Russian currency fluctuation and inflation. According to January 2018 estimates from the International Monetary Fund (IMF), global economic growth grew 3.7% y/y (compared to 3.2% in 2016), with developed economies growing 2.3% in 2017 (vs. 1.7% in 2016), and emerging markets growing by 4.7% (vs. 4.4% in 2016). After two years of economic slowdown, the Russian economy returned to growth in the fourth quarter of 2016, and GDP growth of 1.5% in 2017 was supported by higher energy prices and the recovery from the ruble depreciation during 2014-2015. The IMF forecasts base Russian GDP growth to be 1.7% in 2018 and 1.5% in 2019, while the Ministry of Economic Development in Russia projects 2.1% growth in 2018 and 2.2% growth in 2019.

The oil surplus in 2014-2016 led to shortages in 2017 due to growing demand and the deal to curb oil output by OPEC and 11 non-members. The average price of Brent rose 24.3% in 2017 to $54.30 per barrel. Due in part to strengthening global energy markets, Russian exports grew by 25.2% in 2017 (according to the Bank of Russia), with crude oil exports up 26.6%, petroleum product exports up 26.3%, natural gas exports up 22.0%, and LNG exports up 9.5%. Crude hydrocarbons and petroleum products comprised 54.6% of total Russian exports. The increased exports drove an appreciation in the ruble exchange rate, which faced pressure due to economic sanctions. In 2017, the ruble appreciated against the U.S. dollar by 14.7%, from an average rate of 67.03 rubles per dollar in 2016 to 58.35 rubles per dollar in 2017. Russian inflation in 2017 was 2.5%, 1.5% below the target of 4.0% set by the Russian Central Bank. The price of Brent crude oil is up approximately 30% year-to-date (October 2018) to approximately $75/barrel, providing a substantial tailwind for Rosneft’s financial results.

Global Oil and Gas Demand

Global Oil Demand:

According to data from the International Energy Agency (IEA), global demand for liquid hydrocarbons (LH) grew by 1.6% in 2017 (vs. 1.3% in 2016) to 97.8 million barrels (mmb) per day, up 1.6 mmb per day vs. 2016. The demand was driven partially by Asia, which accounted for 35% of demand and 66% of growth in demand during the year. Total oil output in 2017 by the 14 OPEC member nations reduced by 1.4% to 32.3 mmb per day, with the production of gas condensate liquids up 1.3% year-over-year to 6.9 mmb per day. During 2017, crude output fell primarily in Saudi Arabia, down 4.4% to 10.0 mmb per day, and in Venezuela, down 12.2% to 2.0 mmb per day. Crude output increased in Libya, more than doubling to 0.8 mmb per day, and in Iran, up 7.0% year-over-year to 3.8 mmb per day.

Source: Rosneft 2018 Annual Report

Source: Rosneft 2018 Annual Report

North American member countries output increased 3.9% in 2017 to 20.2 mmb per day, compared to a decrease of 2.5% in 2016. This trend reversal was primarily driven by U.S. production, where 2017 LH output was up 5.3% year-over-year to 13.2 mmb per day, with crude production up 5.4% year-over-year to 9.3 mmb per day. Canadian production also grew 7.4% to 4.8 mmb per day in 2017, while Mexico reduced its output by 9.5% to 2.2 mmb per day. Asian LH output growth was 3.3% in 2017, down from 3.9% in 2016, driven by a deceleration of LH production rates in China from 6.8% in 2016 to 2.8% in 2017.

Due to slowed production, the IEA showed a 2017 production deficit of 0.4 mmb per day, with commercial crude inventories dropping 6.0% year-over-year as of November 2017. For the full year 2018, IEA predicts LH demand will expand by 1.4% vs. 2017, with the U.S. Energy Information Administration (EIA) forecasting a surplus of 0.2 mmb per day in 2018 and 0.3 mmb per day in 2019. The EIA projects global LH demand to grow 1.7% in 2018 to 100.2 mmb per day, with global LH output up 2.5% vs. 2017 to 100.4 mmb per day.

Global Gas Demand:

The global demand for gas grew by 2.4% to 3.6 trillion cubic meters (tcm) in 2017, according to HIS Markit estimates. 42% of that growth was driven by the Asia-Pacific region, particularly China. Global gas output increased along with demand in 2017, up to 3.6 tcm, with 26% of output attributable to North America, 19% to Russia, and 17% to Asia-Pacific. According to Rosneft estimates, gas producing countries exported 1.1 tcm of gas, with 68% of global gas exports transported by pipelines, and 32% as liquified natural gas.

The liquefied natural gas market grew by 11% to 29.9 million metric tons (mmt) in 2017, which marked the highest growth rate since 2011, largely driven by improved demand in Asia-Pacific (up 12% year-over-year) and Europe (up 22% year-over-year). Demand in Japan was up 0.9% in 2017. During the year, new liquified natural gas projects came on line in Australia, which increased exports by 11.6 mmt to 55.8 mmt, or 39% of global export growth, and the United States, which increased exports by 4.7x to 12.5 mmt. At the Yamal liquefied natural gas project in Russia, the first liquefaction train with a capacity of 5.5 million tons per annum (mtpa) was launched in December 2017. Qatar, the world’s largest liquified natural gas exporter, cut its supplies by 1.1% in 2017 to 81.0 mmt. In July 2017, state-owned Qatar Petroleum announced plans to expand production capacity to 100 mtpa, which will help Qatar maintain its leading producer position globally.

Hydrocarbon Demand Forecasts:

Consensus among global energy authorities is that the proportion of hydrocarbons in the global energy mix will remain more or less unchanged until 2040. Both oil and coal will still be important energy sources for consumption, but its share is expected to decline in favor of gas, nuclear energy, and renewables. According to IEA’s baseline forecast, global oil demand should reach 104.9 mmb per day by 2040, with the majority of growth driven by demand in Asia-Pacific, as the region as expected to account for approximately 37% of demand, or 39.2 mmb per day. North American oil demand will decline to 18.0 mmb per day by 2040, while European oil demand is projected to decline to 8.7 mmb per day. North America is expected to comprise 17% of global oil demand by 2040, with Europe comprising 8% of demand by that time.

Russian Oil Production:

In 2017, Russian oil and gas condensate production came in at 546.8 mmt, down slightly compared to 2016, driven by Russia’s participation in the OPEC agreement to cut production in 2017 and 2018. The primary contributor to the reduction was the Northwestern Federal District, down 5.1% year-over-year to 32.0 mmt, comprising 5.9% of total Russian oil production. Production was down by 3.2% year-over-year to 17.3 mmt in the Nenets Autonomous Area, and down 0.4% year-over-year in the Ural Federal District to 302.8 mmt, which comprised 55.4% of Russia’s total oil production during the year.

Oil and gas condensate refining volumes were down 0.2% vs. 2016 to 280 mmt, and oil exports were up 1.1% to 257 mmt. Russia’s export share in oil and gas condensate reached 47% in 2017, the highest level since 2011. Exports to nations outside the CIS increased by 1.2% to 238.9 mmt, with 66% of export volumes outside the CIS being transported by sea. Exports to CIS countries, on the other hand, decreased by 0.4% to 18.1 mmt in 2017.

Russian Gas Production:

According to CDU TEK of Russia, Russian natural gas production increased by 7.9% year-over-year in 2017, to 691.1 billion cubic meters (bcm). Rosneft’s share of Russian production was 67.6 bcm, approximately 10% of the total production. Russian natural gas export totaled 225.8 bcm during the year, up 5.8% vs. 2016. Exports to nations outside the CIS increased 6.8% year-over-year, while exports to CIS nations were up 0.8% year-over-year. Domestically, primary gas consumers include power generation companies, households, utilities, and companies in the oil, metals, and agrochemical industries. Together, these customers comprise approximately 80% of domestic gas consumption in the country.

Rosneft primarily supplies gas to industrial consumers, households, and municipal utilities. Selling prices are not regulated by the government, and are reached via agreements with customers, with the wholesale prices of gas produced by Gazprom used as a benchmark. Prices vary by region of the country, and are dependent on the region’s distance from the gas production hub in the Yamalo-Nenets Autonomous District. Indexed gas prices for household consumers rose 3.9% as of mid-2017. Gas producers utilize the Gazprom-owned Unified Gas Supply System for supplying gas to consumers, with transportation charges set by the FAS Russia. The prices are driven by two separate fees, a fee for the use of gas pipelines and for gas pumping. Rosneft also utilizes Gazprom’s underground gas storage services to offset seasonal and other fluctuations in gas consumption by end users. The Russian gas market has grown increasingly competitive, with more independent producers going after consumers.

Key Russian Tax Reform:

The Russian government has been implementing the nation’s most significant oil and gas sector tax reform in twenty years. In particular, the reform has gradually abolished oil export levies and increased the mineral extraction tax. Beneficiaries of the reform are oil-producing companies, such as certain subsidiaries of Rosneft, Gazprom, and LUKoil as a result of the Russian government allowing them to raise domestic prices for oil. Refiners stand to lose the most from said reforms, as oil is a necessary input cost for them. The draft law was adopted in the summer of 2018.

Beginning in 2019, oil export duties will decrease annually from the current 30% rate to 0% by the end of 2023. Concurrently, the mineral extraction tax rate for oil and gas condensate will increase. The combination of changes should not affect profits of vertically integrated oil companies, but will impact subsidiaries in the upstream and midstream business areas. Refiners will face an increased price in the oil they process, and refiner taxes will vary on a number of factors, including refinery location, the price of oil, and other factors. The government will offer tax breaks to refiners that satisfy certain conditions, including the refining subsidiaries of large oil companies subject to international sanctions against Russia.

Competitive Analysis

Upstream – Exploration and Production

Rosneft is the largest oil and gas company and Russia, and among the world’s largest holders of hydrocarbon reserves. Rosneft consistently increases production through new exploration and reserves at existing areas. According to an audit performed by DeGolyer & MacNaughton, Rosneft’s proved hydrocarbon reserves totaled 39,907 million barrels of oil equivalent (mmboe) as of the end of 2017. Reserves grew 6% during the year, and the company’s proved organic reserve replacement ratio was 184%. Rosneft’s proved reserve life is approximately 20 years, a leader among publicly traded oil and gas companies. Rosneft’s total daily hydrocarbon production grew by 7.6% in 2017, making it a global leader.

Rosneft’s market share in Russian oil production is approximately 41%, and its share in total global oil production is approximately 6%. Rosneft has maintained its high reserve replacement ratio, and intends to replace at least 100% of its hydrocarbon reserves through 2022. Rosneft possesses a portfolio of upstream assets to drive production growth over the long term, and will utilize new drilling technologies to increase development efficiency. In 2017, Rosneft commissioned the Kondinskoye field of the Erginsky cluster (Khanty-Mansi Autonomous Area) and the Severo- Tyamkinsky, Kosukhinskoye, the Severo-Tamarginskoye field of the Uvat group of fields (Tyumen Region), and the Kuzovatkinskoye field (Khanty-Mansi Autonomous Area). Some of Rosneft’s newer, high potential oil and gas projects include the Vankor cluster, the Erginsky cluster, the Russkoye, Kharampur and North Komsomolskoye fields, Rospan, and the Kynsko-Chaselskoye group of fields.

Gas is increasingly produced and used throughout the world as the cleanest fossil fuel, and Rosneft has invested in its gas operations, and is a leader among Russian gas producers. Rosneft has significantly expanded its domestic gas resource base, and has built a portfolio of long-term contracts for gas supplies to the domestic market. Rosneft’s development of the Zohr field, one of the largest gas assets, is expected to expand Rosneft’s expertise in joint development of offshore gas fields and international exploration and production projects. The Zohr field is being developed in partnership with Eni (60%) and BP (10%), and will allow Rosneft to enter the Egyptian gas market.

Downstream – Refining and Selling

Rosneft is the largest refiner in Russia. Rosneft consistently invests in expansion and upgrade of its refining facilities to augment its scale advantage. Rosneft is Russia’s largest exporter of petroleum products, and its crude oil is sold to Europe, Asia-Pacific, and CIS nations. Its crude is also sold for refining to Rosneft’s own refining subsidiaries domestically and abroad. Rosneft’s strategic focus is boosting export volumes under long-term contracts, which makes cooperation with key partners an important competitive advantage internationally, including Belarus, Germany, and China. Through its acquisition of a 49% stake in Essar Oil Limited in August 2017, Rosneft entered the Indian oil refining market and continued its plan to diversify into Asia-Pacific markets. Rosneft’s primary competitors in Russian oil exports are Russian vertically integrated players such as LUKOIL and Gazprom, while international competition includes ExxonMobil, Chevron, Shell, BP, and Saudi Aramco, among others.

Political and Geopolitical Factors

A brief overview of Rosneft’s history is important to understand the political circumstances and risks surrounding it today. Rosneft is the successor company to the Russian oil giants Yukos and TNK-BP. After the fall of the Soviet Union, Russia’s enormous natural resource base moved from state ownership to private (oligarchic) control, and Western capital flooded the country to take advantage of opportunities in its fledgling capitalist system. BP, one of the earliest Western oil companies operating in Russia, merged its Russian oil interests with some of the oligarchs in 2003, and its TNK-BP joint venture eventually controlled over a quarter of national oil reserves.

When Vladimir Putin took over the presidency in 2000, he felt that oligarchs had become too powerful relative to the Russian government, and cut them down to size by consolidating the country’s energy sector. Putin oversaw the consolidation of two gigantic state conglomerates, Rosneft for oil and Gazprom for natural gas. Rosneft acquired the assets of the country’s largest private oil firm – Yukos – after its founder Mikhail Khodorkovsky was arrested and jailed for opposing the regime. In Putin’s third term, TNK-BP (then Russia’s third largest oil producer) was merged into Rosneft in 2013, with BP retaining an approximate 20% stake in the combined entity. Both Rosneft and Gazprom are the crown jewels of Russian strategic assets, and have remained so even as oil prices fell in mid-2014. Rosneft’s CEO is Igor Sechin, Putin confidante since the early 1990s and a prominent name on the U.S. Treasury sanctions list. Sechin has served as President of Rosneft since 2012, and the strong momentum he placed behind Rosneft’s acquisition of TNK-BP is a major reason Putin supported the deal. Sechin is known to be ambitious, and has sought to outmaneuver rivals to gain power over other Kremlin elites.

Sechin, Rosneft Employee, and Putin (Photograph by kremlin.ru)

Sechin, Rosneft Employee, and Putin (Photograph by kremlin.ru)

Until very recently, Gazprom held a monopoly over Russia’s natural gas exports, but lower global prices and diversification projects in Europe, Asia, and the Middle East have weakened Gazprom’s position in those regions. Buoyed by Gazprom’s troubles, Sechin has sought to strengthen Rosneft’s position, resulting in his 2016 acquisition of Bashneft, Russia’s sixth largest oil company. In 2017, Rosneft replaced two board members who had commercial ties to Gazprom with new appointees.The company has also sought to gain a slice of the natural gas market that Gazprom has long dominated. Rosneft increased its annual natural gas production from 2 bcm in 2012 to 67 bcm in 2016, and aims to produce 100 bcm by 2020. While still less than 25% of Gazprom’s production, it demonstrates Sechin’s desire to upend traditional business hegemonies and play an even greater role in Russia’s hydrocarbons sector. In addition, Rosneft has offered customers more flexible natural gas pricing options to win new business, which has forced Gazprom to do the same to preserve market share.

Rosneft’s expansive energy assets also serve as political leverage that the Kremlin can use to browbeat foreign governments. This has led many to wonder how involved the Russian government is in the company’s general strategy. Due to Putin’s close ties to Sechin and the Russian government being a 50% shareholder in Rosneft, many experts believe Putin’s government uses Rosneft as a geopolitical tool to challenge U.S. interests, most notably in Venezuela. This causes Rosneft to make foreign deals and investments that might not make sense from a purely economic perspective.

Sechin’s increasing power and influence have caused many to refer to him as Russia’s second foreign minister, as he represents the economic power behind Russia’s foreign policy. As an example, Rosneft has invested in Venezuela, a Russian ally that has a highly turbulent economy and political climate. Rosneft has been a crucial financial backer for the Venezuelan oil industry, and has lent the government approximately $10 billion over the past three years, helping it to avoid a sovereign default. In 2016, in return for Rosneft’s loans, Caracas offered a 49.9% stake in Citgo, the Venezuelan state oil company’s refining subsidiary in the U.S., as collateral. The was deal heavily criticized by the U.S. Congress as a national security threat.

Putin and Venezuelan President Nicholas Maduro (Photograph by kremlin.ru)

Putin and Venezuelan President Nicholas Maduro (Photograph by kremlin.ru)

Why is Moscow so interested in Venezuela? There are a few reasons. Since the early 2000s, Russia-Cuban relations have chilled, and Caracas’s oil reserves, OPEC membership, and geopolitical situation, made it a logical replacement. Close ties with Venezuela allow Russia to gain another well of oil and gas from which to draw (especially if they do not repay their debts), a greater measure of influence over OPEC, and, perhaps most importantly, strengthen Russia’s position in the Americas. Roseneft’s presence in Venezuela has given Russia access to markets it has traditionally not easily broken into. If Venezuela defaults on its loans (and hands over half of Citgo as collateral), Rosneft would have a significant influence over the US energy sector. Citgo currently owns 4% of U.S. refining capacity.

Rosneft has used similar methods to support the regime of Bashar al-Assad in Syria, improve relations with the Iranian government, and to ally Moscow with Ankara amid heightening tensions between Turkey and the West. Russia has invested more than $4 billion in Kurdish oil fields, and Rosneft has become the primary buyer of Kurdish oil as Western oil majors reduce their investments. Rosneft has also invested heavily into other strategic geopolitical nations such as Saudi Arabia, Cuba, China, Egypt, North Korea, and Vietnam. This trend of the Russian government using oil as a political lever to counter the United States shows no sign of slowing down, and has alarmed foreign policy experts and members of Congress.

Due to Rosneft’s leading position in the Russian energy sector, its increased foreign expansion, and Sechin’s top-tier alliances within the Russian elites, many consider him to be the most powerful man in Russia after Putin. The U.S. government (along with many other NATO governments) increasingly views Rosneft as a strategic arm of the Putin administration. Rosneft’s investments in politically sensitive countries have increased since the 2014 invasion of Crimea, after which Sechin and the company were hit with sanctions, cutting off a host of investment opportunities in the West.

As a result of Western sanctions, companies such as ExxonMobil have pulled out of Russian joint venture projects. Rosneft plans to return to the project in 2019. In order to fund oil projects after being cut off from Western capital markets, Rosneft has turned to heavy borrowing from domestic bond markets. 2017 was Rosneft’s highest one-year borrowing, with the company raising $17 billion (approximately 1 trillion Russian rubles), more than it borrowed in 2015 and 2016 combined. Rosneft’s 10-year bonds have a coupon rate of approximately 8.35%. Future borrowing costs for Rosneft and other Russian companies depend on many factors, such as the price of oil and further Western sanctions. However, with the price of oil up to $75/barrel, Rosneft’s earnings have been very strong despite sanctions.

In sum, the delineation between Rosneft’s profit motive and the Russian government’s political motives is hard to discern, and Rosneft functions as a corporate lever that can empower Vladimir Putin’s foreign policy objectives. Due to Western sanctions on Russia, there are many developed markets in which Rosneft is unwelcome, which has forced the oil giant to deal in frontier economies that carry elevated geopolitical risks. In addition, Western sanctions (and the resulting loss of joint venture partners such as ExxonMobil) have forced Rosneft to raise capital via domestic debt markets, increasing the company’s leverage burden and making it more vulnerable to future oil price falls. All of these factors heighten Rosneft’s risk profile, as the effect of sanctions, combined with the pursuit of Russian foreign policy at the expense of purely economic motives, cause it to make investment decisions that may be suboptimal for shareholder returns.

Disclaimer: This article is not intended as investment advice and is intended for informational and entertainment purposes only.