FULL REPORT: Russia - Foreign firms operating in lucrative sectors will face rising risk of asset seizure

Former Soviet Union 19 October 2022

FULL REPORT: Russia – Foreign firms operating in lucrative sectors will face rising risk of asset seizure

Written by:
Merjen Atayeva
Gribov Andrei Aleksandrovich / Shutterstock

TorchlightTorchlight Predictions

  • Moscow will retaliate against companies seeking to exit Russian market by taking control of lucrative assets
  • Threat will rise as Russia’s economy comes under greater strain, with affected businesses facing substantial financial losses
  • Moscow will seek to limit impact of upcoming Western sanctions by further developing maritime energy logistics

Developments

  • President Putin signs a decree to transfer the Sakhalin-1 oil and gas project’s management in Russia’s Far East from major US energy firm ExxonMobil to a subsidiary of Russia’s biggest oil exporter Rosneft. The decree gives foreign shareholders of Sakhalin-1 a month to apply to retain ownership stakes via the new management entity. (7 October)
  • ExxonMobil announces its exit from Russia after Moscow “unilaterally terminated” its interest in Sakhalin-1, where production has declined substantially in recent months due to ExxonMobil’s rejection of domestic insurance for tankers of Sovcomflot, Russia’s largest shipping company. (17 October)
  • Rosneft expands its tanker chartering business ahead of upcoming Western sanctions on Russian seaborne oil. (17 October)
Source: Statista

Insights

Moscow will maintain its strategy of seizing assets of companies operating in key sectors which are seeking to exit Russia due to its invasion of Ukraine. The government’s takeover of Sakhalin-1’s operational management repeats its similar moves in August to control a sister project, Sakhalin-2. Moscow will intend its latest decree as a way to retaliate against ExxonMobil’s plan to sell its stake, by seizing control of the lucrative energy project, with the likely aim to restore production from the current 10,000 barrels per day (bpd) to pre-invasion levels of 200,000 bpd. 

Russia will sell ExxonMobil’s 30% stake in Sakhalin-1 to a domestic company. Moscow is highly unlikely to fully reimburse the US company, as the decree only requires Russia to evaluate the shares and provide compensation, minus the cost of any “damages” – such as decreased production – perceived to be caused by ExxonMobil. For its part, this means that ExxonMobil is likely to launch legal action against the government due to the associated financial losses. Meanwhile, the project’s other major foreign shareholders – India’s ONGC Videsh and Japan’s SODECO – will likely seek to retain their stakes of 20% and 30% respectively via the new operator so as to avoid similar penalties.

Moscow will attempt to further develop maritime logistics as a means to limit the impact of Western sanctions. Upcoming restrictions include a ban on maritime insurance for importers of Russian oil that fail to observe a price cap set by the G7 and EU. ExxonMobil’s refusal of local insurance on Russian tankers, some of which were bound for India, showcases the potential for sanctions to disrupt Russia’s oil exports. The Kremlin will therefore want to ensure there are domestic alternatives, both in terms of insurance providers as well as tankers, evidenced by Rosneft’s expansion into oil shipping.

Implications for Business

Asset seizure: Foreign companies operating in Russia’s key sectors, including energy, banking and mining, will continue to face elevated risks of asset seizure over the coming several months. This risk will grow as Russia’s economy comes under even greater strain over the long term, due to the impact of Western sanctions and reduced access to key energy markets, in addition to the government’s current unsustainable policies designed to shore up the economy. Affected businesses will risk incurring significant financial costs, including from litigation proceedings against the government. Meanwhile, firms operating in Russia will continue to be exposed to reputational and sanctions risks.

Oil markets: The upcoming Western sanctions will have a disruptive impact on oil markets, sustaining high and volatile prices. Moreover, the Kremlin will likely enact its threat to suspend all supply to countries that support the Western efforts, exacerbating the energy crisis in Europe in particular. The impact of this may be only somewhat offset by suppressed demand as a result of increased prices.

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