by Reuben Brewer
Sept. 2, 2014 (TSR) – The Ukraine conflict is an ugly mess, and it’s led to back and forth sanctions between the West and Russia. Only Russia is very important to Europe’s energy well being, which complicates things materially. And it helps explain why Germany just approved the sale of RWE oil and gas assets to Russian Mikhail Fridman.
What’s in a sanction?
One of Russia’s most important exports is energy. For example, the country exported roughly 70% of its oil and liquids production in 2012 according to the U.S. Energy Information Administration. And roughly 80% of those exports went to Europe. Around 75% of its exported natural gas goes to Europe, too. That’s why putting a crimp on Russia’s energy industry is such a big deal. Oil and gas revenues account for roughly 50% of the country’s federal budget revenues. If Europe stops buying, Russia will feel some pain.
But the dependence cuts both ways. Europe needs Russian oil and natural gas to keep itself humming along, and Germany is the prime example: Almost a quarter of the natural gas Russia exports goes to Germany, and it’s also the single largest consumer of Russian oil.
Germany is also the fourth largest country in the world by gross domestic product. So it would a be a pretty big deal if Germany fell into a recession because it chose to stop buying Russian energy products. No wonder the energy sanctions that the West imposed on Russia were pretty soft. For example, natural gas wasn’t affected and only energy deals entered into after August would feel the hit.
The wording was purposely vague, however, so that the sanctions could be given some teeth if needed. But that would require a stiff backbone based on the energy interdependence between Europe and Russia, so it really isn’t shocking that Germany just approved the sale of RWE’s oil and gas unit, DEA, to Russian Mikhail Fridman even though Germany is at odds with Russia over the Ukraine. For roughly $7 billion Fridman will acquire nearly 200 oil and gas licenses or concessions across Europe, northern Africa, and in the Middle East.
Regardless of the sanctions, Germany could have blocked the deal based on its own trade laws if it posed a threat to Germany’s energy needs. But Stefan Kapferer, Germany’s Deputy Economy Minister, explained that Germany didn’t feel it would put the country’s energy supply at risk. Clearly, placating Russia wouldn’t do that.
Of course, the EU has given it antitrust approval, too, so Germany isn’t going against the grain here nor is it breaking any rules or sanctions (the deal was struck in March, before the sanctions’ August deadline). But letting Russia operate as if nothing has changed isn’t the best way to get it to stop antagonizing Ukraine.
Helping out a buddy
Then there’s the RWE issue. The company is one of Germany’s largest energy companies and, well, it’s been struggling. The company’s top line has been roughly stagnant since the turn of the decade, and earnings fell deeply into the red last year. Although earnings are back in positive territory so far this year, the sale of the oil and gas unit is important to RWE’s long-term health.
For example, during the second quarter conference call, CEO Peter Terium noted that the company “has gone through a real downturn.” And while he is upbeat about the future, he pointed out that the DEA deal “will be the most important transaction” on the disposition front this year. This one deal is nearly twice the size of all of 2013’s dispositions.
In other words, if this doesn’t get done, RWE’s outlook changes. And likely not for the better, or it wouldn’t be selling the assets to begin with. So Germany’s approval also helps one of its own, along with the company’s roughly 23 million power and gas customers throughout Europe, which helps explain why the EU approved the deal. It looks like everyone wins — except maybe Ukraine, since Germany and the EU are acting like it’s business as usual when it comes to Russia and energy.
First published in Motley Fool.
