Assessment of impact of sanctions that US and EU imposed on Russia

I. Assessment of sanctions’ impact:
New sanctions will impact Russian economy and Putin will factor that in when making Ukraine policy, perhaps, prompting him to put greater pressure on separatists to negotiate. But these sanctions won’t force Putin to make major concessions on Ukraine, such as cutting support for separatists altogether or allowing Kiev to defeat them.
Both US and EU have structured sanctions in a way that seeks to inflict tangible damage on Russian economy without damaging multi-billion dollar business that US and EU majors are doing in/with Russia (see summary of Western corporate exposure to Russia here), such as banning or limiting access of a number of leading Russian companies, including Rosneft, Novatek and VEB, to financing. These sanctions won’t go unnoticed, of course. It won’t be just the sanctioned companies that feel see Western financing decline, Western companies will try to limit lending to other Russian entities as a precaution, as they have done after 1st round of sanctions.  However,  most of the  sanctioned companies are controlled by the state, and, therefore, can always tap into Russia’s rainy day funds, which total hundreds of billions of dollars, for loans. The new sanctions fall short of earlier threats to impose sanctions on entire sectors of the Russian economy, and, are generally a far cry from the Iran-style sanctions. US inability to make good on its threats of sectoral sanctions reflects not only Obama’s reluctance to damage US majors’ direct business ties with Russia, but also his reluctance to give competitive edge to European businesses, which would benefit from any major US unilateral sanctions on Russia. As for EU, it is even less likely to reach a consensus on sectoral sanctions, given its economic ties to Russia.

II. Summary of Sanctions:

EU’s 07.16.14 sanctions, formulated as part of EU 07.16.14 summit’s conclusions

  • The European Council requests the European Investment Bank to suspend the signature of new financing operations in the Russian Federation. European Union Member States will coordinate their positions within the EBRD Board of Directors with a view to also suspending financing of new operations. EBRD and EIB bans will be tangible, if imposed.  EBRD lent $2.46 billion to Russia, its biggest loan recipient, in 2013 alone while EIB planned to loan $800 bn this year. Yes, Russia’s own rainy day funds total hundreds of billions – can easily finance instead of EBER and EIB, but recall how Russian debt market froze after 1st round of sanctions, such bans change private lenders’ assessment of risks of dealing with Russian entities. That said, however, bans are not automatic, however, Russia is one of 64 countries that are shareholders of the EBRD, so EU reportedly has to win the support of other pro-Western countries that are shareholders to overcome Russia’s opposition.
  • European Council invites the Commission to re-assess EU-Russia cooperation programmes with a view to taking a decision, on a case by case basis, on the suspension of the implementation of EU bilateral and regional cooperation programmes. However, projects dealing exclusively with cross-border cooperation and civil society will be maintained. Translated from diplomatic language: whatever we do, you won’t even notice. Won’t impact decision-making by Russia.
  • Tasks the European Council to adopt the necessary legal instruments and to decide by the end of July on a first list of entities and persons, including from the Russian Federation, to be listed under the enhanced criteria.
    • Asked if Russian energy companies like Gazprom or Rosneft could be targeted for sanctions, an EU official said, "This is a significant broadening of the criteria, which enables a much broader list than we have yet seen, but I cannot speculate what kind of additional entities would be added." (Reuters, 07.17.14). Something tells me Gazprom, Rosneft and other majors that EU countries do multi-billion dollar business on won’t be on that list.
  • Asks to  consider the possibility of targeting individuals or entities who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilisation of Eastern-Ukraine. Won’t impact decision-making by Russia.
  • European Council requests the Commission and the EEAS to present proposals for additional measures in particular on restricting investments in Crimea and Sevastopol. Won’t impact decision-making by Russia.
  • The European Council expects the International Financial Institutions to refrain from financing any projects that explicitly or implicitly recognise the illegal annexation of Crimea and Sevastopol. Won’t impact decision-making by Russia.
  • Agreed to remove restrictions they had placed in February on the export of military equipment to Ukraine.
    • Lithuanian President Dalia Grybauskaite said on arrival at the summit that the EU was "still far away" from a decision to impose sanctions on sectors of the Russian economy, or an arms or technology embargo. (Reuters, 07.17.14). So meaningful sanctions still improbable.

U.S. 07.16.14 sanctions Obama: “What we are expecting is that the Russian leadership will see once again that its actions in Ukraine have consequences.” (RFE/RL, 06.17.14).
The following transactions by U.S. persons or within the United States involving the persons listed below are herby prohibited:  transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity of these persons (listed below), their property, or their interests in property.  Won’t impact Rosneft’s JV with Exxon, but tangible blow, as sends signals to Euro-lenders too. Tangible, but not lethal – can secure financing from Russia’s rainy day fund, China. Interestingly, US treasury classifies these sanctions, as sectorial, though they don’t apply to entire sectors of Russian economy or exclude Russian companies from entire sectors of US economy, as earlier threatened.

  • Vnesheconombank (VEB), leading state-owned lender with assets amounting to 4% of GDP, finances large domestic infrastructure projects, top exports deals.
  • Gazprombank, Gazprom-owned bank is third largest bank in Russia.
  • Novatek, Number 2 gas producer in Russia, which is controlled by Timchenko, who has been sanctioned by US as individual earlier, and  in which Total owns more than 20%.
  • Rosneft, Russia’s No 1 oil producer whose CEO Sechin, who has been sanctioned by US as individual earlier.

Also, the following individuals and entities banned from travelling to US and doing business with US with their assets frozen. Note that US business majors are not doing any business  with any of the companies below, hence, USG applies full bans, including freezing of assets, rather than shyly limit loans as with Rosneft, which has multi-billion dollar JV with Exxon.

  • Kalashnikov. Russia’s leading gun maker. This will deal a big blow to Kalashnikov – 40% of its civilian arms exported to US.
  • Almaz-Antey manufactures surface-to-air missile systems currently used by the Russian military.  Almaz-Antey doesn’t sell its S-300 or S-400 to US or borrows abroad, so won’t be a problem.
  • Bazalt is involved in the design and construction of air launched ordnance, rocket propelled grenades, and armored fighting vehicle ammunition. Same as in case of Almaz-Antey.
  • Sozvezdie develops and produces high-tech control and communication systems, radio electronic warfare and special equipment for military forces.  Same as in case of Almaz-Antey.
  • NPO Mashinostroyenia is a leading Russian rocketry company responsible for defense programs involving cruise missile complexes capable of surface, underwater, and ground platform-based launches. Same as in case of Almaz-Antey.
  • KBP Instrument Design Bureau is a research and production center that creates precision-guided weapons.
  • Radio-Electronic Technologies designs and produces electronic warfare equipment.
  • Uralvagonzavod is a Russian government-owned company that builds a variety of military equipment. Same as in case of Almaz-Antey.
  • Russian governnment officials, separatist leaders.

III. Reaction:
Russian reaction:

  • The ruble-traded MICEX dropped 2.5 percent in early trading and was down 2.2 percent at 1,442 points at 11:30 a.m; the dollar-traded RTS index was down 3.5 percent at 1,303 points. MSCI global emerging equities index was down 0.26 percent. State-owned energy group Rosneft fell 5.7 per cent in early Moscow trading, while gas producer Novatek lost more than 11 per cent. (FT, 07.17.14, Reuters, 07.17.14).
  • Sechin: the sanctions would not affect Rosneft's current project with ExxonMobil, but would damage the shareholders of U.S. companies cooperating with Rosneft, U.S. sanctions on the Russian state-controlled energy company are illegal because it has no role in the crisis in Ukraine. (Reuters, 07.17.14).
  • Putin:” "Sanctions have a boomerang effect and without any doubt they will push U.S.-Russian relations into a dead end, and cause very serious damage." In conversation with Obama, Putin expressed "deep disappointment" at "unconstructive decision" to impose new sanction. (BBC, Interfax,07.17.14).
  • A senior executive at a large Russian state bank: US sanctions against Russian financial institutions would trigger an uncontrollable fight which he likened to a third world war. “Everybody will suffer,” he said, adding that state banks might default on their foreign currency debt and the government might retaliate by nationalising US oil companies’ assets in Russia. (FT, 07.17.14).
  • Medvedev suggested on Thursday Russia could increase defense spending in response to "evil" new Western sanctions. "Any sanctions are evil," Medvedev said in televised comments at the meeting. "The international record shows that such sanctions have never been able to bring anyone to their knees." (MT, 07.17.14).
  • Deputy Foreign Minister Sergei Ryabkov vowed that Russia would take similar measures against the United States that would be "quite painful and serious." (WP, 07.17.14).
  • Russian Foreign Ministry: "We consider the new set of U.S. sanctions on Russia as a primitive attempt to avenge the fact that developments in Ukraine are not following Washington's scenario.” "It is widely known that sanctions are a double-edged sword," the ministry said, adding that it reserved the right to introduce retaliatory measures of its own which could mean the U.S. business community also lost out. "We are disappointed that the EU, contradicting its own interests, succumbed to the blackmail of the U.S. administration and followed the path of sanctions," it said.(Reuters, 07.17.14).

Western experts:

  • The result is likely to be an increase in the cost of financing for Rosneft, which has grown increasingly reliant on pre-financing oil supply deals with firms including Glencore and BP. But it will not "directly affect or limit Russia's oil exports the way that sanctions on Iran were designed to do," said Gary Hufbauer, expert on economic sanctions at the Peterson Institute for International Economics in Washington, DC. (Reuters, 07.17.14).
  • Joseph Cotterill of FT on UN sanctions: Note that wording carefully. “US persons” could extend beyond the US. Meanwhile “new debt of longer than 90 days maturity” could extend beyond US dollar debt. It does not, however, include US dollar clearing generally, the US Treasury says. Nor, it seems, CDS which references prohibited underlying debt. (FT, 07.16.14).
  • The latest U.S. sanctions "could have been a lot worse," Douglas Jacobson, an attorney at Jacobson Burton in Washington and sanctions expert. "The sectoral sanctions list is extremely narrow in terms of parties and what it prohibits." (Reuters, 07.17.14).
  • The latest effort "will limit the sources from which Rosneft can get financing and thus raise the cost of capital for the firm," according to Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. "It does not prohibit U.S. firms from doing business with Rosneft or bar Russian energy supplies from flowing into the global market." (Reuters, 07.17.14).
  • "Obama Administration is trying to squeeze Rosneft against continuing to go to the Exxons and BPs and asking for loans," said Amy Jaffe, international energy policy expert at University of California, Davis. (Reuters, 07.17.14).
  • Timothy Ash, a market analyst with Standard Bank in London: “This represents a seismic hit to Russia, and to Russian markets. With such prominent companies sanctioned, questions will now be asked which other Russian companies will next be on the list.” (FP, 07.17.14).

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