Putin: ”The U.S. and European Union are shooting their own companies in the foot.”
Russian state owned oil company Gazprom is turning to China for foreign sources of capital now that the U.S. and European financial markets are closed to them.
Gazprom said in a press release posted on its website today that it was in talks with the behemoth Industrial and Commercial Bank of China for funding. The statement did not say whether funding would be provided, however.
This has been quite the week for China-Russia relations. Li Keqiang was in Russia earlier this week to discuss deeper economic integration. Energy remains front and center. But integration is occurring beyond oil and gas deals. For instance, the Bank of Russia announced a deal with the Moscow Exchange to trade currencies and create forex derivatives contracts between the two markets.
Russia is aching to settle business in Chinese yuan, partly in a snub to the Western powers, and partly out of necessity because of Western sanctions.
Last week, BNP Paribas said it was no longer offering letters of credit to sanctioned Russian banks dealing with commodities traders. BNP Paribas has run afoul of European Union sanction law in the past, and was fined heavily for it.
Both the U.S. and European Union banned its banks from providing Russian companies with financing beyond 90 days.
Like all modern companies, reliable credit lines are imperative to running a business. Russian banks can only handle so much.
Gazprom is Russia’s most important company. Not only is it drilling for most of the oil Russia discovers, but its cash flow generation is imperative to a healthy Russian government balance sheet. The company has lost over $20 billion in market cap over the last several months due to sanctions.
In late June, the U.S. and E.U. banned its energy companies from conducting any business related to exploration and development of Russian hydrocarbons. Gazprom’s international partners forced to sit on their hands, but Gazprom does not have the luxury to wait. It needs capital, and its most reliable source of low cost funding is presently unavailable.
So the company hosted a meeting between Alexey Miller, Chairman of Gazprom, and Jiang Jianqing, Chairman of the Board of Directors, Executive Director of Industrial and Commercial Bank of China (ICBC) in an effort to remedy the situation.
On the table were discussions on building a new relationship between Gazprom and ICBC, which would include trade and corporate credit, issue of Gazprom bonds priced in the Chinese currency as well as the creation of a ruble-renminbi payment system for oil and gas transactions between the two countries.
Gazprom is a hefty borrower. Banks love big multinationals with government banking, especially those in what is arguably the most important sector of the world economy: energy.
But sanctions may have cost some U.S. and European banks a major client. “Sanctions are stupid,” Russian president Vladimir Putin said in Moscow recently during an investor conference called Russia Calling. ”The U.S. and European Union are shooting their own companies in the foot.”
Gazprom ended 2013 with over 2.4 trillion rubles ($615 bllion) in long term debt and 1.4 trillion rubles in short term debt. Around 80% of Gazprom’s long term financial obligations are in low cost dollar and euro loans. Foreign banks account for around 75% of Gazprom’s short term loans.
China is the perfect source for financing. Beijing is trying to open its capital markets, and lending to foreign institutions is par for the course. Gazprom make for a solid borrower, with tons of collateral in the form of gold…black gold that is.
For Gazprom, Chinese interest rates aren’t as low as what Western banks can offer. But they are still more attractive than Russian banks. China’s benchmark interest rate is 6%, while Russia’s rate is 8%.
By Kenneth Rapoza, Forbes