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. Last Updated: 07/27/2016

Earnings Rule Imperils ExIm Oil Loan

Some $2 billion in foreign loans for Russia's oil sector are hanging in the balance as government ministries wrangle over special exemptions needed to unlock the money, officials say.

Russian oil companies have already signed agreements with foreign banks to receive some $878 million in five-year loans, which would be provided under a $2 billion U.S. Export-Import Bank guarantee program, according to Igor Starostin, head of the Fuel and Energy Ministry's foreign trade department. But the ExIm Bank has made its guarantees contingent on a number of changes in Russian regulations, including the removal of a requirement that all exporters exchange 50 percent of their hard-currency earnings for rubles.

The Fuel and Energy Ministry has proposed that the government exempt all oil companies using foreign loans -- including ExIm Bank program participants Chernogorneft, Nizhnevartovskneftegaz, Tatneft and Permneft -- from the 50 percent rule. Other government officials, however, worry that exempting oil exporters from the rule, introduced in 1992 to support the Russian currency by balancing demand for dollars, could prove too costly for the state.

The 50 percent rule is not the only obstacle standing between the companies and their loans. Under a Dec. 31 decree designed to liberalize oil exports, many appear to have lost valuable export-tax exemptions as well as long-term export quotas needed to secure the loans.

But Starostin said the hard-currency issue was the most significant.

"The 50 percent regulation is the main obstacle to using the credits," he said. "First, a company has to transfer money to Russia, then it has to sell it for rubles, then it has to buy dollars again with the rubles, and finally transfer it to the lender. ExIm Bank's concern is that at some stage the money may never come out of Russia to repay the credits."

He said the government's Commission on Operative Issues would consider the Fuel and Energy Ministry's proposal once all the relevant ministries had prepared their opinions, which should happen sometime this quarter.

Under a framework agreement signed in July by ExIm Bank and the government, all hard-currency export earnings must remain on foreign collateral accounts as a key element in the credit security scheme, according to Vadim Dormidontov, project manager at the Russian Project Financing Bank, which advises oil companies on the credits.

Companies that comply with the 50 percent rule lose significant portions of profits that they could have used to boost production, he said. "Only banks benefit from the transfers and exchange," he said

Vera Ivanova, an expert with the Economics Ministry, agreed. "It is not just a question of the companies losing 2 percent of the money during the transfers," she said. "Unless the rule is canceled, they would have to export twice as much oil to qualify for the loans."

Ivanova said President Boris Yeltsin had set a precedent in November 1993 when he partially exempted privatized oil giant LUKoil from the regulation until 1999 to enable it to repay a $700 million loan to Japan's ExIm Bank. She added, however, that officials at the Economics Ministry were split on the issue.

Officials at the Finance Ministry, a key participant in the discussion, could not be reached for comment. But a top government analyst, who spoke on condition of anonymity, said the ministry was opposed to the proposal because its calculations showed that the state would lose revenues if the regulation was removed.

But Starostin argued that the loans would allow oil companies to boost production, thus increasing tax revenues to the government.

"The government would receive about 60 percent of the increased production in taxes and duties and could use those revenues to stabilize the ruble," Starostin said. "In the meantime, while the companies cannot use the Exim Bank credits, interest on the loans is already applied."