By Joshua Schneyer and Edward McAllister
NEW YORK, July 17 (Reuters) - President Barack Obama aimed adirect blow at Russia's economic heart on Wednesday withsanctions on Rosneft, the flagship oil giant thatgenerates more than 4 percent of the world's crude and over 8percent of the country's GDP.
But in a change of tack from previous similar efforts, themeasures were narrowly tailored to slowly starve the state-runenergy firm of U.S. dollar funding, not bar it from doingbusiness with oil buyers such as BP or stymiemultibillion-dollar ventures with firms like ExxonMobil,experts say.
The sanctions against key parts of the Russian energy andfinancial industry were intended to serve notice to Moscow thatits refusal to curb violence in eastern Ukraine hasconsequences.
In announcing the sanctions, which also hit No. 2 naturalgas producer Novatek as well as two banks and eightdefense firms, the Treasury Department said U.S. companies wereonly prohibited from engaging in any "new debt of longer than 90days maturity or new equity" with the energy firms and banks.
The measures would not freeze the Russian firms' assets "norprohibit transactions with them beyond these specificrestrictions," the Treasury Department said. That marked achange from many earlier measures that effectively shut down asanctioned firm's ability to do any business with U.S. entities.
The result is likely to be an increase in the cost offinancing for Rosneft, which has grown increasingly reliant onpre-financing oil supply deals with firms including Glencore and BP. It may need to seek out new banks for loans,and could eventually slow investment in new projects.
But it will not "directly affect or limit Russia's oilexports the way that sanctions on Iran were designed to do,"said Gary Hufbauer, expert on economic sanctions at the PetersonInstitute for International Economics in Washington, DC.
Washington has long barred U.S. companies from investing inIran, and more recently has imposed sanctions that have halvedits oil exports over Tehran's nuclear program.
"The U.S. is scaling its sanctions to have a slow increasein pressure on Russia," Hufbauer said.
To be sure, Wednesday's sanctions will intensify the tensionbetween the West and Moscow over Russia's role in Ukraine, andtherefore add to broad geopolitical unease across the oilsector. The impact on a deal to buy Morgan Stanley's physical oil trading business, which is now pending before theU.S. foreign investment approval committee, is not clear.
Yet the immediate effect may be less dramatic than in March,when Obama's first major sanctions sparked a brief wave of panicamong energy traders who feared they may be cut off from keycounterparties such as global commodity merchant Gunvor, whosefounder and then co-owner Gennady Timchenko was targeted.
Washington added Rosneft's chief executive Igor Sechin tothe sanctions list a month later.
The latest sanctions "could have been a lot worse," DouglasJacobson, an attorney at Jacobson Burton in Washington andsanctions expert. "The sectoral sanctions list is extremelynarrow in terms of parties and what it prohibits."
Obama told reporters the measures were "significant" butalso "designed to have the maximum impact on Russia whilelimiting any spillover effects on American companies or those ofour allies".
FUNDING SQUEEZE
Thus far, Washington's sanctions have had only a limitedimpact on the Russian energy industry, a cornerstone of thecountry's $2-trillion economy, resulting mostly in higherborrowing costs for domestic companies.
Even as the pressure has mounted over recent months,executives from Total, BP, Statoil andExxonMobil have all visited Russia, underlining the importancethey attach to business with the world's leading oil producerwith current output of around 10.5 million barrels per day(bpd). Rosneft alone pumps about 40 percent of that.
Experts said that Rosneft's business partners would notlikely be in danger of falling foul of the sanctions.
The latest effort "will limit the sources from which Rosneftcan get financing and thus raise the cost of capital for thefirm," according to Jason Bordoff, director of the Center onGlobal Energy Policy at Columbia University and a senior WhiteHouse energy adviser until late 2012.
"It does not prohibit U.S. firms from doing business withRosneft or bar Russian energy supplies from flowing into theglobal market."
Sechin, speaking at a BRICs meeting in Brasilia, said thesanctions would not affect Rosneft's current project withExxonMobil, but would damage the shareholders of U.S.companies cooperating with Rosneft.
Exxon has a $10 billion joint venture with Rosneft off thePacific island of Sakhalin producing over 100,000 bpd. Aspokesman for the company declined to comment.
A spokesman for BP, which has a 20 percent stake in Rosneftand a number of large joint exploration projects, said thecompany was considering implications of the new sanctions, buthad no additional comment at this point.
A spokesperson for Schlumberger NV, which drillswith Rosneft on the Russian island of Sakhalin, was notimmediately available to comment.
Chevron has a stake in a Russian pipeline and lastfall inked a $10 billion deal to develop Ukrainian shale.
"We are reviewing the sanctions to ensure strict compliancewith the law and we continue to monitor events," Chevronspokesman Kent Robertson said.
PRE-PAID OIL DEALS?
A larger question may be Rosneft's more than $15 billionworth of oil-related finance arrangements known as pre-paymentdeals, in which loans are repaid through future oil supplies.
Such deals have raised billions of dollars for Rosneft,which borrowed $30 billion in two separate loans in 2012 and2013 to help finance last year's $55 billion acquisition ofTNK-BP. In addition to BP and Glencore, Rosneft has done dealswith big global traders Vitol and Trafigura as well.
With pressure over Ukraine mounting, however, some energycompanies had already begun discussing a possible switch tousing other currencies to settle the transactions. While oil istypically priced in U.S. dollars, in theory deals can be settledin any currency the counterparties agree on.
Some firms had also begun to back away from dealing withRosneft. Part state-owned lender Lloyds Bank pulled outof a $2-billion prepayment facility with Rosneft announced lastmonth to avoid embarrassing the UK government, bankers had said.
"I think the Obama Administration is trying to squeezeRosneft against continuing to go to the Exxons and BPs andasking for loans," said Amy Jaffe, international energy policyexpert at University of California, Davis. "Eventually,everything that limits a big state oil company's access tofinancing would have an effect on production, just not rightaway." (Reporting by Joshua Schneyer and Ed McAllister; Editing byJonathan Leff and Ken Wills)
BP (BP.)
Glencore (GLEN)
