Russia mulls more active crude, gas trading in ruble and euro

Moscow (Platts)--7 Apr 2014 1002 am EDT/1402 GMT

Moscow is considering switching some of its oil and gas trading to the ruble and euro to reduce its dependence on dollar-based trading due to increased tension with the West over the conflict in Ukraine.

Some in the sector saw this change as inevitable and rational, while others, including leading oil companies, said any change was unlikely to be significant and would take time to come into effect.

Russia exports its crude, oil products and gas under contracts that are linked to the dollar, and energy commodities account for almost half of the federal budget's earnings.

The switch in trading to rubles will help reduce Russia's dependence on dollar transactions in export operations, the head of one of Russia's biggest state-run banks, VTB, Andrei Kostin said over the weekend.

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Kostin said he had discussed the issue with the heads of state-run companies Gazprom and Rosneft and the Rosoboronexport arms company, which jointly export goods to the value of $230 billion/year.

"I talked to [Gazprom CEO Alexei] Miller, [Rosneft CEO Igor] Sechin and [Rostech CEO Sergei] Chemezov, and they all said they are ready [for trading in rubles]," Kostin said in an interview with Russia 24 TV network Saturday.

Rostech is a state-run company designed to help modernize the Russian economy through development of high-tech products for civil and defense industries. It owns the arms export company Rosoboronexport.

In an interview, Kostin spoke of the necessity to secure stable trading due to serious tension between Russian and western companies over the situation in Ukraine as well as Crimea's decision to break away from Kiev and join Russia.

Western sanctions have so far had an impact on more than just the business activities and travel plans of targeted individuals. Visa and Mastercard briefly suspended transactions made by customers of the Rossiya bank, sparking calls for Russia to develop its own national payment system.

Major Russian banks have already started consultations on the issue, Kostin said, and some officials said progress could be achieved within several months.

"It is time to change the entire international financial system that considers the dollar the key reserve currency," Kostin said.

"The world has changed. [China's] yuan and [the Russian] ruble have to take their place in international transactions," he added.

Russian officials have long considered the idea that transactions between two countries could be made in their two currencies, rather than the dollar.

"It's strange for Russia to sell its crude, say, to Kazakhstan for dollars," Kostin said.


Meanwhile, Alexander Dyukov, the head of Gazprom Neft, the trading arm of Russian gas giant Gazprom, said Friday his company is looking into the possibility of switching to use the euro as the currency in supply contracts.

"We have talked through with our customers on the possibility of switching contracts to the euro, and virtually all, 95%, of buyers have confirmed they are ready to switch to payments in euros," Dyukov told reporters in St. Petersburg Friday.

Dyukov said the impact of such a switch is hard to quantify.

"It would, of course, be necessary to study the effectiveness of such a switch; whether it would lead to some additional losses or overheads. For me, this question remains open," he said.

While Kostin spoke of the possibility of trading in rubles only for new contracts, others did not rule out a broader implementation.

A source familiar with the initiative said: "It will be rational to switch contracts with countries with which [Russia] has major trade turnover into transactions in rubles or currency of those countries."

Such a move could be implemented in trading with India, China or European countries, the source added.

Analysts said it would have only a limited impact on current business because ongoing contracts are unlikely to be affected.

"The share of new, ruble-linked contracts would unlikely be material, and implementation would take time," analysts at Alfa Bank said in a note.

However, they said such a move could translate into additional transaction costs for international buyers, who would need to buy rubles at foreign exchanges to pay for the Russian commodities in rubles.

This would also make Russian crude and gas less competitive on the global market because switching to the ruble would "imply some extra undesirable transaction costs for international buyers," the analysts said.

Meanwhile, Russia's biggest oil producer, Rosneft, said the company "is abiding to its contract obligations and continuing payments in the currency stated in the contract."

The country's second-biggest oil producer, Lukoil, said the company's contracts with foreign customers are all in dollars and this would likely remain the case.

"We have no plans to change currencies; for now, dollar trading is allowed," a company spokesman said.

Bashneft declined to comment on the issue but said the company's operations had so far not been affected by US and EU sanctions and remained stable.

Rosneft, Lukoil and Gazprom Neft also said their operations had remained stable.

Many officials in Russia have also spoken of the necessity to set up a Russian oil benchmark because the country is one of the world's biggest oil producers and its key export blend, Urals, accounts for a more significant share of the global crude market than Brent.

Urals price is assessed as a differential to North Sea benchmark Brent, while the new Russian export blend to eastern markets, ESPO, is assessed as a differential to Dubai, the crude benchmark for the Asian markets.

--Nadia Rodova,
--Rosemary Griffin,
--Edited by Jonathan Loades-Carter,

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