U.S. consumers stand to take the major hit from additional Russia sanctions if the Trump administration moves forward with the next stage.
Russia's weight in the energy markets could lead to a spike in crude oil should the U.S. puts restrictions on additional Russian companies. The effect of sanctions in the global price of aluminum is a clear example of what could happened to the price of crude oil.
Early this year, the U.S. attempted to impose sanctions on United Company Rusal, Russia's largest aluminum producer, since it is majority owned by Russian oligarch, Oleg Deripaska, a close Putin ally. Rusal is the largest company that the Trump administration has ever been put on its sanctions list and the second largest aluminum-producing company. However, aluminum prices spiked more than 7% showing that Rusal is a company that is "too big to sanction."
We think the same applies to Russian energy powerhouses like Rosneft (OJSCY) , Gazprom (OGZPY) , Lukoil (LUKOY) and Novatek (NOVKY) , which together represent the majority of oil and gas production in Russia. These large swings in aluminum prices are proof, in our view, that the U.S. Treasury has attempted to bite off more than they can chew with a company that is too big to sanction, as potential disruptions in aluminum supplies, which are used in everything, threatened to ripple across other economic sectors.
According to a Bloomberg report, the European Union announced in September a plan with Russia and China to sidestep U.S. sanctions on Iran by using a payment system separate from the dollar to give oil buyers a way to buy Iranian crude, as the U.S. moves to block it in early November. The creation of a circumventing trade channel away from the U.S. financial system could soften the effect of the sanctions and make it easier for Iran to continue selling its oil.
The U.S. Treasury is in a very difficult position as Europeans and Asian companies are maneuvering to ease sanctions on Russia given the potential impact on the crude oil and natural gas market. Europeans currently do not have another source of cheap, reliable natural gas imports as it has with Russia, except buying highly priced LNG, which is what the U.S. has wanted all along.
Further sanctions, including Russia's sovereign debt market and energy companies, would put downward pressure on Russian economic growth, increase strain on the local and international banking sector and potentially lead to Russian retaliation against U.S. interests, the most sensitive of which are crude oil and exports of natural gas.
We anticipate that further sanctions to Russia will be muted or unlikely and we continue to favor taking long positions in Russian energy companies as they continue to benefit from weak ruble, high crude oil prices and record production levels.
For now, we are sticking to our long recommendation on Rosneft shares as the top Russia oil play, and Gazprom as our top natural gas and liquefied natural gas (LNG) play.