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. Last Updated: 07/27/2016

Oil Decree Opens Way To $2 bn in U.S. Loans

A new presidential decree paves the way for the release of up to $2 billion in U.S. government-guaranteed loans for infrastructural renovation of Russia's dilapidated oil and gas industries, bankers and oil industry officials said Friday.


The decree, signed Thursday by President Boris Yeltsin, abolishes an obligation for Russian oil exporters to sell half of their hard-currency export earnings to the Central Bank for rubles.


"This is an important development in that it will permit a number of the financings to go through," Sergei Boboshko, president of Chase Manhattan Bank International, said of the decree. "It is an important step for the development of the Russian oil and gas business."


The compulsory sale of hard-currency earnings had been a key obstacle to financing a 1993 accord signed between Russia and the U.S. Export-Import Bank, under which Ex-Im Bank agreed to provide at least $2 billion in financing in support of U.S. exports to the Russian energy sector.


The compulsory sale rule meant that oil companies did not retain sufficient hard-currency earnings to service their debts in the eyes of the scheme's commercial creditors.


But this week's decree is set to remove that impediment and allow a slew of infrastructural loans to be released.


"This is a green light to go ahead and finalize the agreements," said Miljenko Horvat, president of Citibank Russia. "There was no way Ex-Im would have proceeded without this issue being taken care of."


Citibank was the first to take advantage of the accord, announcing last September deals totaling more than $550 million to finance Russian purchases of U.S. oil-drilling and production equipment.


"We are very happy to see that the decree has been signed," said Horvat. "We've been waiting since November to have these issues confirmed, and now we are anxious to finish the documentation and disburse the loans."


So far 11 agreements (worth $1.4 billion) out of a total of 13 have been negotiated under the accord. Other lenders include Chemical Bank, Standard & Chartered and Soci?t? G?n?rale.


Under the agreement, the only deals eligible for U.S. government guarantees are those "that will improve the production and efficiency of the oil and gas sector quickly, deals that will most quickly produce incremental revenues for Russia," according to Horvat.


For example, he said, oil exploration projects are unlikely candidates, because it often takes five years or more to produce significant revenues.


Chase Manhattan has signed an agreement with Tomskneft, an oil-producing association based in Tomsk, to extend a loan for the purchase of U.S. oil-extraction equipment.


"The deal has been agreed for equipment to be used in financing the importation of U.S. equipment for use in the rehabilitation of oil wells," said Boboshko. "Some may not be producing to capacity -- various equipment and services are needed."


An official at the Fuel and Energy Ministry, which has been campaigning to lift the 50 percent rule, welcomed Thursday's decree, telling Interfax it was "certain to bring about a speedy beginning to the application of the credits guaranteed by Ex-Im Bank."


The ministry says the loans will enable oil firms to increase production and so boost tax revenues to the state.


While the Economics Ministry has argued oil firms lose only 2 percent of their earnings from the 50 percent compulsory-sale requirement, firms say they also lose out on foreign-exchange transactions as creditors insist on payment in hard currency in off-shore accounts, while their own revenues are in rubles.


The exchange rule was introduced in 1992 to support the ruble by balancing demand for dollars.