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Urals gets a benchmark

Russia wants a contract for its main export blend. Petroleum Economist talks to the head of the exchange that will offer it

A new benchmark for Russian oil has just 18 months to gain sufficient liquidity amongst international traders to help narrow the discount with Brent, according to Alexei Rybnikov, head of Russia's largest commodities exchange.

The launch of a Urals futures contract is expected to go live in late November. The Kremlin has been trying to establish the benchmark for a decade, ever since President Vladimir Putin first said he was unhappy that Russia's crude was sold at such a hefty discount to North Sea Brent.

For now, Urals is priced in the physical market at a discount to Brent by pricing agencies, which survey traders and refiners. The discount has halved in recent years from the $5-6-a-barrel range in 2005.

"The premium is $2-3/b today but it fluctuates and is subject to market conditions," Rybnikov, president of the St Petersburg International Mercantile Exchange (Spimex), told Petroleum Economist in a Moscow interview. "In our mind, this does not fully explain the difference in quality between the two streams, which is why we want to price Urals on a standalone basis. There is nothing new about the quality of Russian oil - we just want to simply wrap it in a contract."

The project, which has been underpinned by a presidential decree, is being developed by the bourse in cooperation with Russia's energy ministry, central bank, Federal Anti-Monopoly Commission and several of the nation's leading producers. With energy prices having halved in the past two years and Russia trying to get to grips with its worst budget deficit since 2010, the Kremlin needs to scrape together every dollar of crude revenue it can get.

To help lure foreign traders, Rybnikov says the regulator is granting non-Russian firms direct access to exchange-traded commodities and their derivatives.

"When international investors see that domestic investors are actively trading a certain product, it's a very compelling case for them to go to the same marketplace because they will always know that they can sell to domestic investors when they want to leave the market," says Rybnikov.

He says further steps will soon be taken, including providing a cash-settlement option and allowing traders the ability to settle with a partial cargo.

This is the second attempt by the Kremlin to establish a Urals benchmark. In 2006, the Ministry of Economic Development managed to get Russian Export Blend Crude Oil, or Rebco, futures going on New York's stock exchange. The initiative flopped after Russia companies declined to get involved.

The new contract will initially be traded only in dollars, although Putin and other politicians had wanted Russian crude to be traded in only rubles.

"A major role is played by exchanges and we had to explain to government agencies how international futures markets work," said Rybnikov, a former investment banker who previously ran the Micex stock exchange. "It's too complicated, too risky with rubles and you would need to hedge everything. Last year we had a debate and everyone accepted the contract will be dollar-denominated. We need to make the contract liquid enough within one year to one and a half years."

To promote the new instrument, Spimex held a lavish event in London recently, which attracted the leading Russian producers as well as international traders such as Trafigura and Glencore.

Spimex, which was set up in 2008, is chaired by Igor Sechin, a close ally of Putin and the head of Russia's largest oil company Rosneft, which accounts for 40% of Russia's output of Urals blend oil. All the major domestic energy producers are shareholders except for privately held Lukoil.

The exchange struggled for the first few years to make any impression but is turning a profit now after the government forced producers to sell up to 10% of their domestic transport fuel supplies there. It also offers spot and derivatives trading in oil products such as jet fuel and gasoline and hopes to expand its trading next year to the Eastern Siberia-Pacific Ocean, or Espo, pipeline brand.

Spimex has received approaches from strategic investors and commodity exchanges but Rybnikov says the bourse is going its own way in a bid to improve Russia's oil-price discovery and let domestic companies generate extra revenue from trading,

"We are not entertaining any ideas about changing the corporate structure at the moment," he says. "From time to time, we register interest from international funds and even some international exchanges but we are not pursuing discussions because so much needs to be done internally."

In the meantime, its main task will be to convince the market of the viability of the new instrument when there are concerns over sanctions, the stagnating domestic economy and the dominant role of the state in the oil industry.

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