Russia's petroleum-based economy is in ruins
Rosneft's Q1 Profit Plummets by 57.4%
Russia's primary oil producer, Rosneft, has reported a dramatic 58% decline in net profit for the first quarter of 2025, compared to the same period last year, according to its latest financial statements. The company's earnings shrank from 399 billion rubles to 170 billion rubles amidst escalating sanctions, sliding oil prices, and a strengthening ruble, affecting the country's oil economy profoundly.
Rosneft, which accounts for half of Russia's oil production, saw its revenue drop by 12% to 2.283 trillion rubles. Operating activities generated 365 billion rubles, but this was insufficient to cover capital expenditures of 403 billion rubles, resulting in negative cash flow. The company's financial statement reflected the challenging macroeconomic environment, characterised by decreasing oil prices, increasing discounts, new sanctions, and a stronger ruble.
Interest expenses on loans nearly doubled during the quarter. To meet its financial obligations, Rosneft took on a record 1 trillion rubles in debt, four times more than in Q1 2024. The central bank's key rate increase inevitably contributed to the surge in borrowing costs.
Analysts at Alfa Bank attributed the significant drop in Rosneft's performance to the adverse impact of a stronger ruble and lower oil prices. The main Russian oil grade, Urals, fell by 9% in the quarter, while ESPO oil dropped by 11%. The ruble price of oil tumbled by a quarter to 5,000 rubles per barrel in March.
The ensuing financial burden from higher interest expenses and macroeconomic factors overshadowed operational efficiencies, despite upstream lifting costs being stabilized at $3 per barrel of oil equivalent. In essence, the sharp profit decline in Q1 2025 was primarily driven by a steep year-over-year drop in net profit, reduced EBITDA, and escalating interest expenses associated with rising borrowing costs, despite stable upstream production costs.
In light of Rosneft's Q1 profit plummet, it's clear the company's financial situation is affected by various factors within the industry, including escalating sanctions and a strengthening ruble in the finance and energy sectors. The challenging macroeconomic environment, marked by decreasing oil prices and rising borrowing costs, has significantly impacted Rosneft's earnings, leading to an increase in interest expenses on loans.
