The Kremlin is reflected in the polished

Western sanctions against strategic portions of Russia’s economy are ratcheting up in the aftermath of a passenger jet crash in a section of Eastern Ukraine controlled by Russian-supported rebels. The Malaysian jet was brought down by a surface-to-air missile that appears to have been supplied by Russia to rebels operating in the region who are sympathetic to, and materially supplied by the Kremlin. The rebels apparently mistook the peaceful civilian jet for a Ukrainian military aircraft.

The European Union today followed the US in enacting stricter sanctions against Russia, including strategic energy companies. At this point it appears state-controlled Gazprom has not been directly targeted, but associated financial vehicle Gazprombank has. Oil giant Rosneft is also one of the companies facing various western-imposed sanctions.

European dependence on Russian natural gas supplies – over which Gazprom has an export monopoly – makes it difficult to punish the Russian gas company without also potentially damaging European energy security.

Given the relative versatility of oil flows not strictly reliant on pipelines and LNG infrastructure, European countries and companies are less reliant on Russia for oil than natural gas, which is likely why Rosneft has been targeted while Gazprom has not. However, several major international oil companies have strategic relationships with Rosneft. And arguably no company is more closely tied to the Russian firm than BP, which recently acquired a nearly 20% stake in the company.

As a result, BP recognized in its Q2 2014 financial statements considerable risk associated with its equity stake in Rosneft and other joint ventures with the company.

“On 21 March 2013, we completed the sale of our 50% interest in TNK-BP to Rosneft and the purchase of additional shares in Rosneft. We now own a total shareholding in Rosneft of 19.75%. To the extent we fail to maintain a good commercial relationship with Rosneft in the future, or if as a result of our non-controlling interest in Rosneft or otherwise we are unable in the future to exercise significant influence over our investment in Rosneft or pursue other growth opportunities in Russia, our business and strategic objectives in Russia and our ability to recognize our share of Rosneft’s income, production and reserves may be adversely impacted. If further international sanctions are imposed on Rosneft or new sanctions are imposed on Russia or other Russian individuals or entities, this could have a material adverse impact on our relationship with and investment in Rosneft, our business and strategic objectives in Russia and our financial position and results of operations.” – BP Q2 Financial Results (page 36)