8th May 2014
As the Ukraine crisis ratchets up day by day – with forces friendly to Putin’s Russia invariably coming out on top – the response of the United States and the European Union has been media campaigns, hand-wringing and sanctions. But could economic distancing do more harm to companies caught up in a financial war such oil giants BP and Royal Dutch Shell – both key components of income fund strategies – than to Russia? Or are they a “I won’t let you play with my ball” response that will leave markets and big oil untouched?
Financial journalist Tony Levene considers the issues.
So far, neither western propaganda nor slaps on the wrist from politicians make any difference to a regime whose leaders have spent most of their lives on the receiving end of similar actions. Western governments know this but they need to make a statement.
With military action seemingly impossible only economic sanctions remain. The UK government has named 26 Russians whose UK assets have been frozen and who are subject to a travel ban. Other countries such as Switzerland and the United States have similar lists and similar sanctions. But no one knows what assets and what travel plans these individuals might have. Some have openly mocked visa restrictions – why would they want to go to America?
Russia knows it has stronger weapons in the shape both of its oil and gas supply and in its relationship with the western system than travel bans. As a nation, it is arguably the creation of globalisation so it knows the financial health of companies such as BP and Shell comes before feelings for Ukraine. And for a country where the siege of Leningrad and the battle of Stalingrad are constantly evoked, western sanctions are not even a flea on an elephant’s back.
In its various modes – street demonstrations in Kiev, the annexation of Crimea and the current near civil war in eastern Ukraine – the crisis is some five months old. During that time, world markets have remained stable. There have been two or three days when a fall in stock markets has been attributed – possibly – to unrest in Ukraine. The VIX, the global fear index, has remained remarkably stable – around 14 to 17, compared with 40 plus when markets decide there is real fear.
The oil majors all have interests in Russia. BP has a 19.75 per cent stake in Russian oil giant Rosneft, whose share price has been hit by rouble weakness and an interest rate rise induced Moscow stock exchange sell-off, losing the UK firm around £550m. But investor reaction to a sanctions or counter-sanctions threat to BP from sanctions or counter-sanctions has been non-existent. BP shares, around 300p during the Gulf of Mexico oil spill, now stand at 504p, a 35p gain over the past year. They yield 4.68 per cent.
Shell has interests in common with Gazprom. If either Gazprom or Rosneft – both closely associated with the Russian regime – were named in sanctions, it could cause problems for these UK oil majors – and for US-based Exxon as well. Shell, whose shares yield 4.43 per cent, has its shares at a five year high at £25.13, up from £22.86 a year ago.
But so far, the market believes that governments will avoid affecting oil interests or that non US oil companies will find ways around the ban or that the effect will be so minor as to be virtually ignored.
A day is a long time in stock markets – as it is on the streets of Ukraine – and there is always the chance of the situation changing for the worse as Russ Koesterich, BlackRock’s global chief investment strategist, points out.
In one of the very few, if any, comments on Ukraine, he says: “Volatility is still unusually low due, to some extent, to the Federal Reserve’s still-easy monetary policy and benign credit conditions. However, we also read the low volatility as a sign that investors are overly complacent and that potential bad news is not discounted into stock prices. It is impossible to predict exactly what might happen in Ukraine, but it does seem clear that if the violence continues to escalate and economic sanctions become more stringent, we are likely to see higher stock market volatility and increased selling.”
But in relation to oil companies, there are other narratives. If Russia does squeeze supply – and the coming of the European summer makes gas a less potent weapon – it could push up the price of oil so that BP, Shell, Exxon and so on see reserves valued upwards. Brent crude currently stands just below $108 a barrel, marginally above its average for the past year.
Longer term, this could also be a similar moment to the 1970s oil price increase from $4 to $12 a barrel. That led to lower consumption – the end of the gas guzzler in the US – and to a new exploration push.
Russian action in the Ukraine is a free advert for alternative energy sources as well as an incentive to frack.
Meanwhile the oil majors and their investors remain calm. They do not believe Western governments will act to harm their own financial interests. Would the UK government ban Russian and Ukrainian flight money from buying prime London property? Does it really want to burst the bubble? And does the UK want to decide between the worthy and the worthless when both have hard cash?
Those favouring economic sanctions can claim some success in South Africa and Zimbabwe for instance, but in both cases, they were backed by internal dissent and guerilla action. Boycotting Barclays did not end apartheid. In any case, in the Ukraine dispute, dissent and weaponry belong to the side the West opposes.
With global corporations and international markets now so much more powerful than many nation states which have yet to develop a methodology to deal with them, shareholders in big oil can rest easy. The future belongs to them – at least until a viable alternative to oil emerges.