Russia’s military intervention in Ukraine threatens to derail
energy exploration in a region that holds a quarter of the world’s
natural gas reserves, weigh on currencies from the Baltic to the
Mediterranean, and force American, Western European and Russian
companies to work to contain the damage.
The conflict has prompted Chevron Corp. to heighten security for
employees involved in searching Ukraine’s shale fields for gas. The
eastern European nation’s ambitions to become an exporter of shale gas
by 2020 could be dashed as the conflict escalates, while Russia faces
the prospect of economic sanctions that may curb gas sales that account
for 20 percent of its export revenue.
Editor’s Note: 5 Reasons Stocks Will Collapse . . .
“If you’re a major western company looking at the Russian market for
investment, you might not want to put your eggs in that basket right
now,” said John Lough, a Russia specialist at the Chatham House, a think
tank in London. “It doesn’t look like we’re going to see positive news
for some time” from the region.
U.S. President Barack Obama on March 1 suspended preparations for a
June summit of the G-8 countries in Sochi, where the Olympics wrapped up
a week ago. While the U.S. may also suspend talks to improve commercial
ties with Russia, serious sanctions are unlikely as the Europeans would
have much to lose if trade with Russia were interrupted, according to
Ian Bremmer, president of The Eurasia Group, a political-risk consulting
company in New York.
“An action-reaction cycle could spiral,” which might spur NATO to
send ships into the Black Sea, Bremmer said in an email. “Shots won’t be
fired, but markets will get fired up.”
Caviar Chips
Unlike in Soviet days, when Russia and its 140 million consumers were
largely isolated from the world economy, domestic and foreign companies
alike have much at stake.
Exxon Mobil Corp. and Royal Dutch Shell Plc pump oil and natural gas
from Russia’s rich fields. Engineering giant Siemens AG reported sales
of 2.2 billion euros ($3 billion) in Russia last fiscal year and plans
to build 1,200 rail cars there by 2020. McDonald’s Corp. has more than
350 restaurants in Russia and about 80 in Ukraine. PepsiCo Inc. last
year reported Russia revenue of $4.9 billion, from products such as
soda, yogurt and potato chips in flavors such as crab and caviar.
“If you’re a citizen in the Crimea and you see tanks rolling around,”
said Kenneth Shea, a Skillman, New Jersey-based analyst for Bloomberg
Industries, “you’re probably not going to go out to the center of town
and go to dinner.” PepsiCo and McDonald’s didn’t respond to requests for
comment. Siemens, Exxon and Shell declined to comment.
Furnaces, Factories
Russian companies, meanwhile, supply much of Europe’s energy. OAO
Gazprom says it provides about 30 percent of the natural gas that powers
electricity generators, furnaces and factories across the region, and
Europe buys about a third of the 4.2 million barrels of crude OAO
Rosneft pumps daily. Any sanctions that curtail or cut off those exports
would have financial consequences for the government of Vladimir Putin.
Gazprom declined to comment. Rosneft, which owns 150 gas stations in
Ukraine, said they’re operating normally but declined to comment on
volumes sent to Europe.
As trading began across Europe Monday, companies with exposure to
Russia and Ukraine saw their shares decline. Gazprom fell by almost 17
percent and Rosneft was off 8.6 percent in Moscow.
Denmark’s Carlsberg A/S, the biggest brewer in Russia, was off 6.9
percent in Copenhagen. The company didn’t respond to requests for
comment. Stada Arzneimittel AG, Germany’s biggest generic-drug maker,
which makes about a fifth of its sales in Russia, fell more than 8
percent in Frankfurt. Stada said its business so far hasn’t been
affected by the tensions.
Currency Hit
Ukraine’s hryvnia lost about 12 percent of its value against the euro
in the two weeks ending Feb. 28 as the pro-Russian government in Kiev
unraveled amid violent street protests. Russia as well as nearby
countries such as Poland, the Czech Republic, Hungary, and Turkey could
also see their currencies suffer, said Anders Aslund, a senior fellow at
the Peterson Institute for International Economics in Washington and a
former adviser to the Russian and Ukrainian governments.
The U.S. and its European allies haven’t taken concrete steps in
response to the weekend’s events, when thousands of Russian troops
occupied the Crimean peninsula – home to a majority Russian-speaking
population as well as Russian military operations – and Ukraine put its
armed forces on full combat alert and mobilized its reserves.
G-8 Membership
Russia risks losing its membership in the G-8, while the U.S. is
considering imposing sanctions, U.S. Secretary of State John Kerry said.
On Monday, Kerry was en route to Kiev to offer support to Ukraine’s
leaders.
Ukraine has about 39 trillion cubic feet of proven gas reserves,
according to the U.S. Energy Department, enough to supply the country
for two decades. Still, more than half the country’s gas comes from
Russia because domestic drilling has lagged behind consumption growth.
Chevron, which has a $400 million exploration agreement for Ukraine’s
Oleska shale formation, “is closely monitoring the situation,”
spokesman Kurt Glaubitz said in an email. Glaubitz said security
measures had been taken to protect employees and their families in
Ukraine, though he declined to give details.
Metals, another big export industry, could also get hit by the
crisis, according to Morgan Stanley analyst Dmitriy Kolomytsyn. A
shutoff of Ukrainian steel sales to Russia, though, might benefit
Russian steelmakers.
Shops Shuttered
“Russian metal companies would only be hurt in the event of real
military action leading to sanctions, banning them from exporting to
Europe and the U.S.,” Kolomytsyn said. “But it’s too early to say if
such an outcome is possible, as there are no grounds for sanctions yet.”
Russian mobile phone company Mobile TeleSystems, one of the leading
providers in Ukraine, shut several shops in Kiev as the unrest was
peaking. It suffered no damage, spokeswoman Elena Kokhanovskaya said
last week. Russian banks and Gazprom could also be vulnerable if the
crisis escalates, said Micro-Advisory, a consulting group that studies
the region.
Recent and planned Russian stock offerings are also possible victims
of rising tensions. Lenta Ltd., Russia’s No. 2 hypermarket chain, fell
as much as 11 percent in London, its second day of trading following an
initial public offering.
Children’s goods retailer Detsky Mir Group had planned to sell shares
as early as April, people familiar with the matter said last week,
while German retailer Metro AG has said it will sell shares in its
Russian cash & carry business in the first half. Detsky Mir declined
to comment. Metro, whose shares declined as much as 7.9 percent in
Frankfurt, says it’s making good progress with the IPO preparations.
“This includes a continuous assessment of the situation in Ukraine,” a
Metro spokesman said. “While we won’t comment on the political
situation, we hope a peaceful development can be reached.”
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