Influence of Political Tension on Russian Oil Companies and Their Shares from 2022 to the Present Moment

Influence of Political Tension on Russian Oil Companies and Their Shares from 2022 to the Present Moment.

Introduction

⁃ Actuality. Relevance of the change in economic condition of Russian companies in 2022, from which revenue Russia’s GDP largely consists of.

 ⁃ Novelty. I am an independent researcher with a focus on the field of international finance. The topic I have chosen is relatively new and has limited research available. I am particularly interested in studying economic phenomena and trends within a global context.

 ⁃ Object of research. The stock market price volatility of Russian oil companies’ shares in 2022-2023.

 ⁃ Subject of research. Impact of political events occurred in 2022 on the price of Russian oil companies’ shares.

 ⁃ Goal. To check the impact of foreign sanctions which forms the stock price on volatility of stocks in conditions of illiberal market.

 ⁃ Theoretical task is to analyze open sources and describe how political tension influenced the price of Russian oil companies’ shares. The practical task is to come up with a short-term prognosis and to make practical recommendations about buying or selling the oil companies stocks.

 ⁃ Scientific Methods of Research. In my research I have used comparative, abstractive, inductive and deductive methods of reasoning, analysis, statistics and synthesis.

From February 2022 the EU's energy relationship with Russia was at the heart of the sanctions conflict. This is because the EU has always been our major market for oil, gas, and petroleum products, and we were also their main supplier. As a result, the imposition of an embargo on Russian oil was a significant blow to the EU as well as to the Russian oil companies.

The Russian stock market faced significant challenges in 2022, with the Moscow Stock Exchange index dropping by 44% primarily due to worsening geopolitical tensions in Europe and the imposition of strict anti-Russian sanctions, particularly targeting the Russian oil industry. As a result, all shares related to the Russian oil and gas sector experienced declines, causing Russian companies to lose a significant portion of their overall value. This occurred despite the price of Brent crude oil increasing by 8.8% to $85.91 per barrel in 2022. Among all companies in the Russian oil and gas sector, Gazprom was the hardest hit, with its market capitalization falling by 54% throughout the year. This decline was mainly attributed to the explosions that occurred in the late autumn on the Nord Stream gas pipeline and issues surrounding the completion and operation of the Nord Stream-2 pipeline. Consequently, Gazprom's gas supplies to Europe were severely reduced, which negatively impacted the company's stock performance. However, it is important to note that Gazprom was not the only company affected by the strained relations with Europe regarding hydrocarbon exports.

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The quotation of Russian oil companies was negatively impacted by the European Union's embargo on Russian oil imports and the implementation of a "price ceiling" for Russian oil imported by other countries that did not refuse to purchase it. This had a particularly detrimental effect on small Russian oil companies, such as RussNeft, which lost half of its capitalization in 2022. However, even larger oil giants, such as Surgutneftegaz and Gazprom Neft, also suffered significant declines in their stock markets. Surgutneftegaz's common shares experienced a 45% collapse, while Gazprom Neft's shares were relatively less affected, losing only 14% of their market capitalization. Tatneft's preferred shares and ordinary shares saw price decreases of 27% and 33% respectively. Despite the negative impact on the entire Russian oil and gas sector, the decline in most Russian oil companies' shares was not as severe as the broader Moscow Stock Exchange index. The shares of other oil companies performed slightly better than the overall market. This can be attributed to the fact that major Russian oil companies regularly pay dividends on their shares, even during difficult years like 2022.

Geopolitical tensions economic uncertainty and Western sanctions on the Russian oil companies also negatively affected the Russian economy as a whole. The initial estimate from Rosstat indicates that the economy contracted by 2.1% in 2022. This decline is not as severe as earlier projections from government agencies and the IMF, which anticipated a larger drop. The Ministry of Economic Development predicted a 7.8% decrease, the Bank of Russia forecasted a 7.5% decline, and the IMF estimated a 6% contraction. Despite the challenging year, the decline in the physical volume of Russia's GDP did not surpass previous years. In 2020, during the crisis and the pandemic, the economy contracted by 2.7%, and in 2009, during the global financial crisis, the decline reached 7.8%.

In spite of the foreign restrictions, several Russian oil companies have reported positive results for 2022. Tatneft exceeded profit forecasts, Rosneft met expectations, and NOVATEK recommended good final dividends with a yield of 5.2%. This is significant as dividends are often key drivers of growth in the oil industry. Additionally, some risks that were expected to impact the sector's shares were not as serious as initially thought. The increase in the tax burden has been moderate and may have stalled. Production decline due to sanctions is within the lower range of forecasts, and oil refining has remained stable despite the European embargo on petroleum product supply. Furthermore, the weakening of the ruble by over 25% since the beginning of December 2022 has offset the decline in production and correction in global oil prices for oil companies. As for NOVATEK, their growth prospects are linked to expected news on LNG projects. In the current year, the company plans to make a final investment decision on the Ob LNG project, and in December, they anticipate launching the first line of the Arctic LNG-2 plant.

The instant decline in the price of oil companies’ shares was connected with the fear of uncertainty in the economic situation. However, as time showed, the majority of the firms found ways to overcome the negative consequences of political tension in the world. They found new ways to sell petroleum products and not lose the loads of money. Changes in global fuel supply logistics have greatly affected tanker routes departing from Russia. However, according to the International Energy Agency's May report, Russian companies have not experienced a significant shortage of buyers despite the loss of the European market. In fact, Russian exports of crude oil and petroleum products reached a record in April 2023, totaling 8.3 million barrels per day (bpd). This is an increase compared to the average daily sales of 7.7 million bpd in 2022 and 7.5 million bpd in 2021. The availability of petroleum products has also remained stable. In 2022, Russian refineries processed around 5.6 million bpd, with 2.85 million bpd supplied to international markets. While there have been some fluctuations, there were no significant shifts in the volume. In the first quarter of 2023, oil refining volume in Russia reached nearly 70 million tons, a 1% increase compared to the same period last year. Despite the change in routes, Russia continues to find buyers for its refined oil products. Even after the G7 countries, the European Union, and Australia stopped purchasing Russian oil products supplied by sea, Russian companies have managed to find new buyers for their exports. While the exact figures may be difficult to track due to undisclosed deliveries and complex logistics, the overall picture and reports from the IEA indicate that Russian oil products are still finding markets in new and unconventional destinations.