Exclusive - India's Essar seeks loans from traders as banks fear Russian links

LONDON (Reuters) - Indian refiner Essar Oil is looking to raise over $1 billion (719.84 million pounds) from trading houses after its new Russian owners could not raise loans from major Western banks due to sanctions on Russia.

FILE PHOTO: An oil refinery of Essar Oil, which runs India's second biggest private sector refinery, is pictured in Vadinar in the western state of Gujarat, India, October 4, 2016. REUTERS/Amit Dave/File Photo/File Photo

Essar wants to borrow the money for 3-4 years and repay it with cargoes of refined products as it seeks to cut its reliance on lending from Indian banks, banking and trading sources familiar with the discussions said.

It would be the first large multi-year pre-payment deal by Essar, which has previously engaged only in short-term deals.

Russian oil major Rosneft ROSN.MM, fund UCP and Swiss commodities trader Trafigura bought Essar Oil's large refinery, 3,500 fuel stations and infrastructure for $12.9 billion last year.

Kremlin-owned Rosneft has been under U.S. sanctions since Russia’s annexation of Crimea in 2014.

The Essar deal was funded mainly by Russian state banks, including sanction-hit VTB VTBR.MM, and the new owners' attempts to partially borrow from large Western banks have so far not progressed.

Banks are not technically forbidden from lending to Essar, in which Rosneft owns 49 percent. Sanctions forbid lending to entities majority-owned by Rosneft but banking sources have said they would still exercise caution.

“Essar and Rosneft initially signalled interest in borrowing but have gone silent in the past six months after most banks signalled to them they would not be able to lend,” said a source with a major Western bank, which initially received an invitation to express interest.

The new shareholders are keen to diversify their financing base away from relying only on Indian banks as had been the case under the Ruia family who were the former owners, one of the banking sources said.

A spokesman for Essar Oil declined to comment.

Previously, Essar Oil India had credit lines with 26 Indian banks, which complicated the closing of the deal.

Using a prepayment was viewed as a easier alternative to widen its cash base.

However, lending to Essar is also complicated by the types of crude it is relying on for its operations - with significant volumes coming from Iran and Venezuela.

While the international oil embargo on Iran was lifted in early 2016, U.S. restrictions on dollar use in connection to Iran remain. President Donald Trump has also repeatedly criticised the nuclear pact with Tehran and threatened to stop extending U.S. sanctions relief.

As for Venezuela, U.S. Secretary of State Rex Tillerson said the government has been weighing sanctions on the South American country’s oil industry.

Essar is expected to issue a request-for-proposal early in the second quarter of this year outlining the details of the pre-finance loan, a second banking source said. Traders who loan funds would be repaid with gasoline and gasoil cargoes.

Rosneft said last in August last year that Essar Oil planned to double throughput at the refinery and build a petrochemical plant.

Additional reporting by Jessica Jaganathan in Singapore and Nidhi Verma in New Delhi, editing by David Evans