Should Investors Be Worried About BP plc’s Russian Exposure?

Russian war-mongering has thrown Eastern Europe into disarray, and the West has acted quickly to place sanctions on some key arteries of the Russian economy.

Indeed, restrictions placed on interbank lending and the bank accounts of some key businessmen and politicians, have already thrown the country into a recession, after only a few weeks of being in place.

Unfortunately, BP (LSE: BP) (NYSE: BP.US) is extremely exposed to Russia as the company owns a 19.75% stake in Kremlin-controlled oil company Rosneft.

BP acquired this share when it divested its stake in TNK-BP, a joint venture between BP and a group of Russian businessmen last year, and the company’s Rosneft stake now accounts for around a third of BP’s total oil output.

However, this means that BP is exposed to Russia’s crumbling economy, so should investors be worried?

Losing money with friends in high places

Unsurprisingly, BP is already feeling the effects of Western sanctions on Russia. Specifically, last week BP lost $849m overnight on its Rosneft investment as investors dumped Rosneft’s shares amid a broader Russian market sell-off.

Still, while BP has been losing money on paper, the company’s chief executive Bob Dudley has been in Moscow, meeting friends in high places.  

Dudley visited Moscow to take part in a meeting of the Russian Geographical Society, where he is a member of the board; the board is headed by none other than President Vladimir Putin.

Knows the region

As well as having friends in high places, BP knows how to operate within Russia, having been in the country for more than a decade.

For example, BP started TNK-BP back during 2003 with a relatively small $8bn investment. Since its creation, the venture has paid nearly $19bn worth of dividends to BP before the sale to Rosneft.

Now, as Rosneft’s largest shareholder, BP has formed a strong relationship with the company, which after the acquisition of TNK-BP became the world’s top listed oil producer in terms of output.

Further, BP is not the only Western oil company operating within Russia. Rosneft plans to start developing Russian Arctic hydrocarbon resources with ExxonMobil, Eni and Statoil later this year.  

Additionally, Royal Dutch Shell is working on the Sakhalin gas-export project in Russia’s Far East and France’s Total SA is developing a liquid natural gas export plant in the Arctic.

As of yet, none of these companies have felt threatened enough to cancel plans to do business within Russia. Moreover, as tensions within Eastern Europe rise the price of oil is also rising; great news for oil companies. 

Summary

So overall, BP and Rosneft are solid partners and it does not look as if this will change any time soon. 

That said, BP is likely to suffer some losses on its Rosneft investment as the Russian currency weakens, although these losses should be offset by higher oil prices.