The Daily Update - Russia

The U.S. government's Countering America's Adversaries Through Sanctions Act was signed into law by Donald Trump on August 2.  For S&P it ‘has no immediate implications for Russia’s sovereign credit rating’ of BB+ positive on a foreign currency basis.  Moody’s see the codification of the sanctions into law as credit negative for Russia as their reduction or removal will require congressional approval and may discourage FDI, although they have made no change to their Ba1 (stable) rating.  They also see sanctions law as credit negative for Russia’s energy sector and Gazprom (Ba1 stable).  The market has also taken a pretty sanguine view of events; at the time of writing US dollar denominated Russian Federation 4.25% 2027 and Gazprom 8.625% 2034 are trading higher on a month to date basis.

European officials are said to be angered by the sanction move and the EU President, Claude Juncker, is reported to have said ‘America first cannot mean that Europe’s interest come last’.  Potentially the sanctions have ramifications for investment in key gas supply pipelines, which is a big issue for Europe as a net gas importer, already at about 200 billion cubic meters (bcm) per year; and demand is expected to continue growing.  Gazprom supplies ~34% of Europe’s gas needs with expansions such as Nord Stream 2 seen as an important for energy security.

Klaus Schäfer, the Chief Executive of German utility Uniper, commenting on the potential impact of US sanctions against Russia on the European gas market stated he believes that the Nord Stream 2 pipeline (a Gazprom’s project that Uniper is a financial backer of) will get built and that ‘European energy policy can’t be at the mercy of American economic and domestic policy,’ and ‘That’s why I’m very pleased that the German government and the European Commission have this firmly in view and have stated their position unequivocally.’  At this stage it is still unclear how the situation will develop but there may be some room for manoeuvre: S&P Platts notes ‘At present, the new US sanctions law gives Trump the power -- but not the obligation -- to impose sanctions on companies involved in European pipeline projects.’  S&P also note that ‘even if Gazprom needs to fund Nord Stream 2 on its own, we believe it can absorb the financial impact without affecting the current stand-alone credit profile or rating.’

Schäfer is of the view that Russian pipeline gas will remain an important supply source as it has been a reliable and is cheaper to source than LNG.  Asia often pays a higher price for LNG shipments than Europe is used to paying and so they will have to compete with Asia on price.  He notes that US LNG cargoes are expensive: ‘On a total cost basis, U.S. LNG prices are currently between €5 and €10 per MWh – or up to 50 percent – above the reference prices in Europe.’  Of 155 LNG cargoes that have been shipped from the US from the Cheniere facility only 17 have come to Europe instead heading to places with lower transport costs or higher LNG prices; only 1.2 bcm of LNG (out of imports of 30 bcm) has come from the US.  These comments echo comments from Gazprom who see LNG as a more expensive source than pipeline gas.   Schäfer concludes ‘I believe that these few numbers alone indicate how far Europe is from meeting its needs predominantly with LNG from the United States. I remain convinced that both types of gas supply – pipeline and LNG – will continue to have their respective function and justification in tomorrow’s global gas market.’

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