Shocked BP to exit Rosneft stake as fresh anxiety set to grip financial markets
27 February 2022
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown
‘’The decision to exit the Rosneft stake will be an eye wateringly expensive one for BP, but the shocked board clearly felt they had no option but to pay the high price and distance the business from Russia’s aggression.
It marks a huge shift in position for CEO Bernard Looney who just two weeks ago indicated that the Rosneft slice remained a core part of BP’s operations, and shows the extent to which corporate Britain is now under pressure to make very stark choices faced with the sharply escalating situation.
Just how BP will manage this exit is unclear but it looks like it will be highly difficult for the company to recover anywhere near what was considered to be the full value of the stake, estimated to be $14 billion at the end of 2021 and it will also strip BP of lucrative dividends which were due to pour in from the Russian business. Last year higher oil prices and foreign exchange tailwinds helped BP’s underlying profit from Rosneft rise to $2.7bn from $56m. There are now estimates that extricating itself could cost BP up to $25 billion.
A write down of this magnitude is also likely to limit the extent to which BP can continue to accelerate its transition towards renewables, but at the same time the crisis is clearly concentrating minds about the need to find alternative sources to reliance on Russian oil with Germany pledging to build up renewable energy as fast as possible.
This move is set to add further volatility to financial markets, with a fresh wave of anxiety expected to take hold following the frightening rhetoric from President Putin.
Parallels are emerging with the Cuban missile crisis in 1962, when financial markets underwent a steep correction after a year of strong market gains, particularly for tech stocks, and there was a fresh market plunge brought on by a highly fraught geopolitical stand-off.
The ramping up of sanctions and more targeted action to freeze out Russia’s financial sector with the exclusion of banks from the Swift international messaging system is a move likely to hit the rouble hard with the Russia currency set for a sharp slide on Monday, while a flight to the perceived safety of the US Dollar and Japanese Yen may intensify.
For now oil and gas though is still flowing from Russia to Europe but signals that governments around the world are ready to tighten the screw of sanctions further are likely to add to fresh concerns about global energy supplies, piling fresh upwards pressure on Brent crude and natural gas prices.
Defensive stocks may be among the few beneficiaries of a volatile trading period ahead, with Western governments set to significant increase military budgets in the face of Russian aggression.
Faced with turbulence it may be tempting for investors to try and switch and ditch stocks but during times of heightened volatility, it’s even more important to try and look beyond daily market moves to long term goals and ensure that your holdings are well diversified across a range of assets and geographies.’’
