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. Last Updated: 07/27/2016

Agency: Rosneft Can Repay Yugansk Debt

State-owned Rosneft is capable of servicing and paying off the debts it picked up in acquiring Yuganskneftegaz, the head of the Federal Property Agency, Valery Nazarov, said Wednesday.

"It appears that Rosneft is able to service its debt independently and considerably reduce its financial debts in the space of a few years," said Nazarov, whose agency controls Rosneft, Interfax reported.

Rosneft, which the government plans to merge with Gazprom by the end of June, has said that its debt levels rose to about $20 billion as a result of Yugansk's purchase last December, as the state forced the sale of Yukos' key production unit to recover part of Yukos' crippling multibillion-dollar tax debt.

On top of splashing out $9.4 billion on Yugansk, Rosneft effectively became liable for Yugansk's $1.4 billion debt to a syndicate of foreign banks, while Yugansk has yet to solve its back tax problems with the authorities.

Before the Yugansk deal, Rosneft also had debts of about $3 billion, including loans from foreign banks.

The sheer volume of Rosneft's total debts, coupled with the oil company's recent announcement that it would not service Yugansk's loans from banks including Societe Generale, Deutsche Bank and ING has prompted speculation that Rosneft could face a cross-default situation should the banks react by recalling loans to both Yugansk and Rosneft.

"If banks were indeed to ask for immediate repayment, then it would be hard for Rosneft to fulfill that demand," said Kakha Kiknavelidze, oil and gas analyst with Troika Dialog investment bank.

Kiknavelidze said, however, that the banks would probably agree to restructure the debts.

"And if there is no demand for immediate repayment, then given the current oil price Rosneft should be able to handle the debt," he said. "But Rosneft would be the most leveraged oil company in Russia."

The threat of cross-default surfaced after Rosneft earlier this month told Western banks that they should seek to recover Yugansk's debt from its former owner, Yukos.

It was unclear Wednesday whether Nazarov's comments meant that Rosneft would drop its plan to stop servicing Yugansk's debts. The loans in question were provided to Yukos in 2003, as part of the oil giant's bid to raise funds for its intended merger with Sibneft. Sibneft called off the merger, however, following the arrest of former Yukos CEO Mikhail Khodorkovsky in October 2003.

Throughout 2004, as Yukos braced itself for a battle against the tax authorities' back tax claims, it made Yugansk the guarantor for the loans. Although Yugansk has changed hands since then, the guarantees it gave to foreign banks remain in force.

Nazarov said Wednesday that the merger of Rosneft with Gazprom was still on track and moving forward.

"The work on the technical aspects of it, adjustments to the schedule ... are under way as planned," he said, Interfax reported. "As soon as there is a decision to make this document public, you would be the first to know."

Nazarov did not elaborate on a possible timeline for completing the merger.