BP risks $25 billion hit from fire sale of Russia assets as Putin’s economy teeters on the brink

On Sunday, the company said it would dump the 19.75% stake it has held for nearly a decade in state-owned peer Rosneft, exit any related activities in Russia, and pull its CEO from the Rosneft board with immediate effect, citing Vladimir Putin’s unprovoked aggression against Ukraine.

“This military action represents a fundamental change,” said BP chair Helge Lund in a statement. “It has led the BP board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.” 

BP’s decision came some 24 hours after the United States, the European Union, the United Kingdom, and Canada on Saturday signed off on what may be the largest package of economic sanctions ever imposed on a European country. 

With Russia now largely unable to process cross-border payments and its central bank barred from accessing certain foreign exchange reserves held abroad that might prop up the currency, Putin’s financial system appeared to be on the verge of collapse. Trading on the stock market has been halted temporarily, as depositors across Russia lined up in long queues already on Sunday hoping to withdraw their savings.

The apparent bank run prompted the European Central Bank to warn on Monday that the European arm of state-owned lender Sberbank, with an estimated €13.6 billion ($15.2 billion) in assets, is likely to fail and may need to be wound up. “The decision follows a rapid and significant deterioration of the banking group’s liquidity situation,” regulators said.

‘Shocked and saddened’

Against this backdrop of a potential economic calamity in Russia and recent heavy declines in Rosneft’s stock price, BP said the dire situation in Ukraine prompted management to reevaluate ties to its local associate.

Shares in BP dropped 6% to 356p ($4.75) on Monday, substantially underperforming the broader U.K. equities market after the company conceded the divestment would result in a “material” hit to its income statement. In a worst-case scenario, the Rosneft charges could easily wipe out BP’s annual profits for 2022.

Analysts warned finding an investor on which BP could unload the stake would prove extremely challenging in the current market environment. “Walking away at this time is obviously not ideal,” RBC analyst Biraj Borkhataria wrote, according to Bloomberg. “That said, the exit from this stake ultimately removes one of the concerns with the long-term investment case.”

Even after Putin mobilized a force of more than 100,000 soldiers on Ukraine’s borders, there was no indication that BP had any intention of rethinking its investments in Russia. Three weeks ago during its fourth-quarter earnings call, the U.K. blue chip was still praising the “significant progress” Rosneft made in reducing absolute emissions and environmentally harmful methane flaring. 

In a letter to the company’s staff on Sunday, CEO Bernard Looney said these were, however, “desperately difficult times” and thanked employees that had reached out to him directly to express their concerns.

“I am convinced that the decisions we as a board have taken are not only the right things to do, they are also in the long-term interests of BP and our shareholders,” he wrote, adding he was “deeply shocked and saddened” by the attack.

Worst-case scenario

U.K. Business Secretary Kwasi Kwarteng, who had reportedly summoned BP’s Looney to explain the company’s ties to Russia, said on Sunday he welcomed the company’s decision to exit its shareholding in Rosneft. 

“Russia’s unprovoked invasion of Ukraine must be a wake-up call for British businesses with commercial interests in Putin’s Russia,” he posted to Twitter. 

The holding in Rosneft stems from its acrimonious divorce with Russian oil major TNK-BP, in which it held a 50% stake. At the time, BP’s then-CEO, Bob Dudley, hailed the settlement as historic and would see BP continue its decade-long role as Russia’s largest foreign investor.

Since both Looney and Dudley resigned from Rosneft’s board on Sunday with immediate effect, accounting rules stipulate the resulting loss of influence calls for an impairment test on the $14 billion carrying value of the Rosneft stake on its books. 

In addition to the write-down, which will be reported in May in its first-quarter report, BP will also have to record a charge amounting to as much as $11 billion from foreign exchange losses accumulated since it acquired the bulk of the Rosneft stake in 2013. 

The scale of the one-off items could translate in a worst-case scenario to headwinds of $25 billion, or roughly three times its 2021 net profits.

While they would likely mean the company posts a loss below the line for the full year, investors can take some consolation in knowing the Rosneft hit is purely on paper and will not drain the company of cash needed for investments and dividends.