Transneft paid off a $10 billion Chinese loan ahead of schedule to mitigate currency exchange and sanctions risks

On 25 July 2018 Transneft, a Russian state-owned oil pipeline monopoly, paid off a $10 billion loan from the Chinese state bank CDBC ahead of schedule, said the company’s CEO Nikolai Tokarev. Though he did not disclose the sum of the final payment, according to Kommersant, a Russian business newspaper, in July Transneft paid CDBC 109.85 billion rubles (approx. $1.75 billion).

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Construction of ESPO pipeline. Image credit: Transneft

After the planned repayment of $1 billion Eurobonds on 7 August, the company does not have any further debt in foreign currencies, which under the current economic conditions is significantly more expensive to finance. Due to ruble depreciation, the real interest rate of the CDBC loan increased in 2018 to 13%, while the interest rate of the Eurobonds reached 21%. The company is actually able to secure financing at any time in local currency in Russia at a comfortable interest rate of up to 10%. During the last years, Transneft has been consistently avoiding borrowing in foreign currencies in order to mitigate exchange risks as the majority of the company’s revenues comes in Russian rubles, said Nikolay Tokarev.

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ESPO-1 pipeline. Image credit: Transneft

Transneft had contracted a twenty-year loan from CDBC back in 2009 to finance the construction of the East Siberia – Pacific Ocean (ESPO) oil pipeline and its extension. The first line of the ESPO pipeline (ESPO-1) with the capacity of 30 million tonnes of oil per year was commissioned in December 2009. The pipeline was designed to transport crude oil for 2,694 kilometres from Taishet in Eastern Siberia to Skovorodino, with 2,046 kilometres extension to Kozmino oil terminal near the town of Nakhodka (ESPO-2). The ESPO-2 pipeline with the capacity of 30 million tonnes of oil per year was commissioned in 2012. Currently, Transneft works on increasing the throughput capacity of the ESPO-1 pipeline system up to 80 million tonnes per year in order to increase oil supply to the People’s Republic of China (PRC) and to Kozmino special seaport, as well as to three refineries in the Russian Far East. Furthermore, the capacity of ESPO-2 will be increased to 50 million tonnes per year. The abovementioned projects will be completed in 2020 and 2019 respectively.

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ESPO-2 pipeline. Image credit: Transneft

According to industry analysts, Transneft decided to get rid of any liabilities in foreign currencies due to its unsuccessful currency exchange risks hedging deal with Sberbank. As a result, the company lost 65.5 billion rubles and filed a claim against Sberbank in the court. Later Transneft and Sberbank reached a settlement agreement, under which the bank provided Transneft with a 253 billion roubles loan. Since the interest rate of Sberbank’s loan was much lower than the one of CDBC, Transneft was able to use these funds to repay its Chinese loan.

According to the Russian press, the company planned to pay its Chinese debt off in 2019. However, Transneft was able to accumulate extra liquidity since its plans to acquire Summa Capital’s share in Novorossisk Sea Trade Port has been postponed due to a prosecution of the Summa Capital’s owners – Ziauddin and Magomed Magomedovs. Another factor that might have affected the company’s decision to repay the loan ahead of schedule was potential U.S. sanctions that would make it more difficult for Transneft to finance borrowings in U.S. dollars.

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