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Are European Companies Ignoring E.U. Sanctions On Russia?

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Screen Shot 2015-06-18 at 22.09.48Are European Companies Ignoring E.U. Sanctions On Russia?

Kenneth Rapoza: 22 June 2015

…some very powerful entities in the E.U. have had it with sanctions. For example, Gazprom, Shell, E.ON and Austria’s OMV Group signed a memorandum last Thursday…

It’s been nearly a year since sectoral sanctions were slapped on Russia for its involvement in helping create a frozen conflict in Eastern Ukraine. European and American companies banned financing of Russian energy firms, and banks. They banned any joint venture deals with Russian oil and gas companies that involved exploration and production, or the selling of technologies used in E&P. But if a string of memorandum of understandings signed during last week’s St. Petersburg International Forum puts anything in the spotlight this week it is this: some very powerful entities in the E.U. have had it with sanctions.

For example, Gazprom, Shell, E.ON and Austria’s OMV Group signed a memorandum last Thursday for a joint venture deal involving a new pipeline that will hopefully one day have the capacity to ship 55 billion cubic meters to European each year. That is bigger than the existing Nord Stream pipeline that takes Russian gas westward.

“Extra gas transmission facilities along the shortest route connecting gas fields in Russia’s north to European markets will provide for higher security and reliability of supplies under new contracts,” Gazprom CEO Alexey Miller said in a statement last week.

Gazprom shares have outperformed the Market Vectors Russia (RSX) exchange traded fund over the last five days, up 3.66% in dollar terms. The market is being reminded just how important this company is to keeping air conditions firing and baseboards heated throughout Europe.

On one hand, European energy companies are getting ready for the end of Western sanctions, which are  not expected to end until next January. On the other hand, lawyers at these firms are working overtime to make sure they’re successful at  loopholing the E.U.

Ben van Beurden, CEO of Shell, said Gazprom will remain an important part of Europe’s energy matrix for some time to come. “Natural gas will remain an integral part of the European energy mix, that’s why such new projects are important to satisfy the demand for energy carriers, especially with an account of the declining domestic gas production in Europe,” he said.

Shell and Gazprom also signed an Agreement of Strategic Cooperation last week. The document provides for developing the strategic partnership between Gazprom and Shell across all segments of the gas industry, from upstream to downstream, including a possible asset swap.

Absent from the St. Petersburg Forum were any announced deals with American oil and gas. ExxonMobil has been cut out of its $700 million joint venture with Rosneft in the Kara Sea because of Washington’s sanctions against the company. Meanwhile, its European rivals are muscling in on one of the cheapest places in the world to drill for hydrocarbons.

The St. Petersburg International Forum, which concluded in the northwestern Russian city on June 20, is a testament to how Russia remains a one trick pony. The deal making is all Gazprom and Rosneft. It’s as if Russia’s private sector, including investor favorites like pay processing firm Qiwi and Russian supermarket player Magnit, does not exist.

Gazprom also inked a sanction breaking 300 million euro loan from UniCredit Austria, state media reported on Sunday.

Last July, the E.U. banned its companies to sign any new financing deals with Russia. In September, the E.U. placed even more restrictions on Russia’s access to E.U. capital markets. The sanctions state that individuals and corporations from the E.U. are banned from providing loans to five major Russian state-owned banks, including Sberbank and VTB Bank, and the three state owned energy companies, of which Gazprom tops the list.

The September sanctions, which went into effect on the 12th of that month, said that companies could no longer provide services related to the issuing of financial instruments, including broker relationships.

In addition, certain services necessary for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia were also banned.

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