Challenge for oil PSUs: How to get $900 million dividends out of Russia

The cumulative value of the dividends has now reached around $900 million, according to latest estimates.

The companies have taken up the issue repeatedly with their Russian partners, and it has featured in government-to-government discussions between New Delhi and Moscow, but a mechanism to move the money — or use it in the bilateral trade between the countries — remains elusive.

Restrictions on Russia

The main challenge in repatriating the income — which is sitting in the companies’ accounts in the Commercial Indo Bank (CIBL), an affiliate of State Bank of India (SBI), in Moscow — lies in the complications arising out of Western sanctions imposed on Russia, including the restrictions put on payment channels, after the war broke out in February 2022.

Soon after Russia invaded Ukraine, major Russian banks were shut out of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) financial transaction processing system, which seriously dented Russia’s ability to access the global payments system.

The Indian companies face additional complexities related to international jurisdictions as some of the vehicles used by them to make investments in Russian oil and gas assets are based in countries such as Singapore.

Investments in Russia

Over the years, Indian public sector companies have spent billions of dollars to pick up stake in oil and gas projects in Russia as part of the energy security strategy of the country, which is heavily dependent on oil imports.

According to one estimate, the total investments by Indian companies in Russia amount to more than $6 billion.

OVL, the overseas investment arm of Oil and Natural Gas Corporation (ONGC), holds a 20% stake in the Sakhalin-1 project and 26% in the Vankor project. A consortium of IOC, OIL, and BPRL — the upstream arm of refining major Bharat Petroleum Corporation (BPCL) — has 23.9% share in Vankor and 29.9% in the Taas-Yuryakh project.

The dividend income is being deposited into the CIBL accounts in rubles, where they are earning a nominal interest. Dividends of around $600-650 million belonging to the IOC-OIL-BPRL consortium, and around $250 million belonging to OVL, are stranded.

No easy options available

With the money stuck in Russia, it could have been theoretically used for payments there, to increase investments, and to fund operational and capital expenditure requirements of existing projects. None of these options are, however, currently feasible.

This is because the dividend payments are being released after deduction of operational expenses, and there is no plan at present to invest more capital into ongoing projects. These assets are past their major capital expenditure cycle, which means that major cash calls, or demand for more investment in the projects, are highly unlikely in the near-to-medium term.

The only exception is OVL, which is required to pay around $600 million to be re-nominated as a shareholder in the Sakhalin-1 project. The company is in talks with Russian authorities to use its stranded dividend income to partly settle this payment.

The Indian companies are also not exploring investments in any other project in Russia. This means the only option left is to use the money for payments in Russia.

The question then arises: why can’t the money be used to partly pay for the copious volumes of Russian oil that is flowing into India? The short answer: while the Indian companies would love to do that, it is fraught with several challenges and complications.

First, while IOC and BPCL do buy Russian oil, OIL does not.

Second, the investments in Russian projects are through special purpose vehicles registered in overseas territories such as Singapore. This means that any payment would also come under the jurisdiction of these overseas territories, not just Russia’s and India’s.

Given the various Western sanctions against Russia and its energy sector, cross payments for Russian oil using the dividend income could end up becoming an extremely complex exercise with regard to taxation and accounting. The companies have been seeking the opinion of legal and international accounting experts to find a way to do this.

The bottom line: any feasible and workable solution is likely to emerge only through a combination of effective diplomacy and smart commercial negotiations with stakeholders in Russia and elsewhere.