Russia reckoning sends energy prices soaring

Russia exports and equities are deeply interwoven in Europe and the UK’s industrial and financial systems and now governments and companies have begun the painful task of unpicking these sales after last week’s Russian invasion of Ukraine. 

For the short term it will mean higher energy prices and a knock to any companies trying to get out of contracts with major Russian suppliers such as Gazprom (RU:GAZP), Rosneft (RU:ROSN) and Norilsk-Nickel (RU:GMKN). These include BP (BP.), which has committed to selling off its 19.75 per cent stake in Rosneft, and British Gas owner Centrica (CNA), which has supply agreements with Gazprom. This won’t come cheap.

BP has flagged a write-down of up to $25bn (£18.8bn). RBC Capital Markets analyst Biraj Borkhataria said this was a good strategic move but would be costly in the short term. “Monetising the stake for fair value looked difficult even in more ‘normal’ times, and now, to us, it looks extremely challenging,” he said.  

Shell (SHEL) will also unwind its own Russian ventures, which have a carrying value of $3bn. 

On top of the company impacts from the extreme pressure Vladimir Putin has brought onto his country with the attack, commodity markets have been up in the air since the troops crossed the border. At the time of writing, European governments have not brought in sanctions covering the energy trade, but natural gas and power prices spiked on the possibility of this happening, worsening existing high levels of inflation. 

“Extreme market uncertainty because of Russia’s increasing military operations in Ukraine and the similarly intensifying risk of [energy] sanctions... are likely driving the surge, with traders factoring in the rising probability of sanctions on gas for each day the offensive continues,” said Kaushal Ramesh, an analyst at consultancy Rystad Energy. This is already apparent in gas and oil markets, with Brent crude climbing above $100 a barrel twice in the past week. 

In response to the potential supply hit, the International Energy Agency (IEA) coordinated a 60mn-barrel stick release. Fellow Rystad analyst Louise Dickson said this only served to stoke panic. She called 60mn barrels “a drop in the ocean” according to the 4mn-5mn barrels of oil per day (bopd) in crude exports that could be lost from the market. 

Equitable response

The FTSE 100 is home to both steelmaker Evraz (EVR) and gold miner Polymetal (POLY), both of which will likely crash out of the index due to major share price losses post-invasion. Evraz is a Plc but is a potential target for sanctions given its largest shareholder is Roman Abramovich, who has fought back against reports he is closely tied to Vladimir Putin but this week committed to relinquishing his ownership of trophy asset Chelsea Football Club. 

The question is what happens now to these Russian companies that have been comfortably listed in London for some time. There has been buying going on – understandable given the dividend yields of 50-100 per cent on offer, but it is unclear whether these will be paid out. Polymetal chief executive Vitaly Nesis made clear on an earnings call this week the rapidly changing sanctions could see the payout pulled. Major banks that rely on constant international currency flows were the worst hit: Sberbank's (RU:SBER) global depositary receipts (GDRs) in London traded as low as 1¢ while VTB Bank (RU:VTB) own GDRs were pulled from trading by the Financial Conduct Authority after US bank BNY Mellon resigned as depositary. Meanwhile, on Thursday morning the London Stock Exchange said it had suspended trading in GDRs of 17 Russian companies including Sberbank, Rosneft, Gazprom and Lukoil. 

Miners without exposure to Russia have had a ball in the past week, by contrast. BHP (BHP) is up 14 per cent, Rio Tinto (RIO) 5 per cent and Anglo American (AAL) 10 per cent. Nickel and platinum group metals (PGM) exposure is prized given the difficulties Nornickel will have selling its products internationally.