Will Rus­sia feel the pinch from sanc­tions?

Financial Mirror (Cyprus) - - FRONT PAGE -

Three ma­jor Rus­sian banks and parts of the coun­try’s de­fense in­dus­try have been hit with U.S. sanc­tions, the third so far, with ex­perts say­ing the move will cause the fi­nan­cial sec­tor to look in­ter­nally for fi­nanc­ing.

The new sanc­tions will af­fect three ma­jor state-owned Rus­sian banks – VTB, in which the state has a 60.9% share; the Bank of Moscow, which is 95.52% owned by VTB; and the Rus­sian Agri­cul­tural Bank (RAB), which is 100% owned by the Rus­sian Govern­ment.

Some me­dia re­ported that sanc­tions were be­ing pre­pared against Rus­sia’s re­tail bank­ing gi­ant Sber­bank, which is 50% owned by the Cen­tral Bank of the Rus­sian Fed­er­a­tion, but this in­for­ma­tion was later re­futed.

Alexan­der Abramov said that Sber­bank will likely be safe from sanc­tions for a long time be­cause so many or­di­nary Rus­sians have ac­counts there.

“Any re­stric­tions and pro­hi­bi­tions on the in­sti­tu­tion will ac­tu­ally mean sanc­tions against 75 mln peo­ple – the ac­tive bank cus­tomers,” Abramov said. “Sanc­tions would then hit the en­tire pop­u­la­tion, not just the fi­nan­cial struc­ture. This is the main rea­son that the Amer­i­cans and Euro­peans will re­frain from the ap­pli­ca­tion of sanc­tions against Sber­bank.”

Un­til sanc­tions are lifted, U.S. cit­i­zens and com­pa­nies are pro­hib­ited from pro­vid­ing these banks and any re­lated en­ti­ties loans last­ing longer than 90 days.

Ac­cord­ing to of­fi­cial state­ments from the U.S. Trea­sury, these sanc­tions are de­signed to limit the abil­ity of banks to ob­tain fi­nanc­ing. These sanc­tions alone are un­likely to have much ef­fect on the liq­uid­ity of Rus­sian banks, how­ever.

They bor­row very lit­tle di­rectly from the U.S. mar­ket and most deals be­tween Rus­sian banks and U.S. in­vestors are car­ried out through the Eu­robond mar­ket. VTB, for ex­am­ple, has a to­tal of $12.7 bln in debt, but only 5.2% of these are Eu­robond loans.

At RAB, this per­cent­age is higher – 20-22% of a to­tal debt of $8.6 bln, but still not ex­tremely sig­nif­i­cant. Fol­low­ing the sanc­tions, any re­fi­nanc­ing of these debts via new loans will no longer pos­si­ble in Western mar­kets for the listed banks.

Alexan­der Abramov, lead re­searcher at the Cen­ter for Anal­y­sis of the Fi­nan­cial Sys­tem at the Rus­sian Academy of Na­tional Econ­omy and Pub­lic Ad­min­is­tra­tion, said that the sanc­tions are un­likely to have much ef­fect on the banks.

“State banks, dur­ing 2015-2017, will need to re­fi­nance a to­tal of $15 bln. This is a sig­nif­i­cant amount, but it is not com­pa­ra­ble to the scale of busi­ness of these banks. More­over, this amount can be par­tially re­placed by some in­ter­nal bor­row­ing or from other sources. These sanc­tions will not achieve a de­ci­sive ef­fect in the fi­nan­cial sec­tor – this is rather a pre­cau­tion­ary step,” Abramov said.

Debt fi­nanc­ing and funds could also be at­tracted via other cur­ren­cies and in other coun­tries – par­tic­u­larly in the Mid­dle East and in Asia. Ad­di­tion­ally, the Cen­tral Bank of Rus­sia has al­ready stated that it will sup­port banks that fall un­der U.S. sanc­tions if nec­es­sary.

Abramov says that the sanc­tions are likely to be most painful for RAB. Un­like VTB, RAB’s busi­ness is not di­ver­si­fied and the bulk of its loans – to agri­cul­tural en­ter­prises and small busi­nesses – are high-risk. Even so, Abramov said, RAB has a life­line in the Cen­tral Bank, which can pro­vide the bank re­fi­nanc­ing up to $2 bln a year.

NOT ONLY BANKS

The United Ship­build­ing Cor­po­ra­tion (USC) – the state hold­ing com­pany that car­ries out 80% of all ship­build­ing projects in Rus­sia, in­clud­ing for the mil­i­tary, was also named in the sanc­tions.

In a state­ment, the U.S. Trea­sury De­part­ment said that un­der the sanc­tions, all hold­ings (as­sets) of the or­gan­i­sa­tion in the U.S. (if any) are sub­ject to con­fis­ca­tion, and U.S. in­di­vid­u­als and en­ti­ties are pro­hib­ited from car­ry­ing out trans­ac­tions with it. In re­sponse, USC said that it has no as­sets in the United States.

Ac­cord­ing to Vadim Kozyulin, an ex­pert on the arms trade at the an­a­lyt­i­cal PIR Cen­ter, sanc­tions against the Rus­sian de­fense sec­tor will limit its fu­ture growth.

“The sanc­tions have neg­a­tive con­se­quences in the clos­ing of op­por­tu­ni­ties that ex­isted be­fore – for the ac­qui­si­tion of tech­nol­ogy and com­po­nent ma­te­ri­als. Do­mes­tic re­sources are in­suf­fi­cient for the Rus­sian de­fense in­dus­try to suc­cess­fully de­velop,” Kozyulin said.

In an­nounc­ing the sanc­tions, U.S. Pres­i­dent Barack Obama said that the new sanc­tions were pre­pared be­cause Rus­sia has not changed its pol­icy to­wards Ukraine and con­tin­ues to sup­port the pro-au­ton­omy mili­tias fight­ing in the eastern part of that coun­try. Ac­cord­ing to Mikhail Rem­i­zov, a Rus­sian po­lit­i­cal sci­en­tist and the pres­i­dent of the In­sti­tute of Na­tional Strat­egy, the sanc­tions re­flect a pre­sump­tion of guilt on the part of the U.S. as re­gards Rus­sia; they are not linked to any spe­cific ac­tion by Moscow.

“In this sit­u­a­tion, re­tal­ia­tory steps are needed,” Rem­i­zov said. “And the main re­tal­ia­tory re­sponse can only be the in­creas­ing of do­mes­tic eco­nomic in­de­pen­dence. Then the price of sanc­tions for the en­tire world will in­crease.”

PUSH­ING TO­WARD BEI­JING

The daily Kom­m­er­sant re­ferred to the es­ti­mates of the Euro­pean Com­mis­sion, ac­cord­ing to which in the case of sanc­tions, Rus­sia’s losses may amount to al­most EUR 100 bln over two years.

On the other hand, Neza­v­isi­maya Gazeta re­ported that eco­nomic sanc­tions may be painful. The news­pa­per said that Rus­sia holds a sig­nif­i­cant part of its for­eign ex­change re­serves of $500 bln in the form of se­cu­ri­ties, but can­not pro­vide its econ­omy with dol­lars or eu­ros with­out some part of these trans­ac­tions hav­ing to go through the Amer­i­can or Euro­pean pay­ment sys­tems.

The au­thor of an ar­ti­cle ti­tled “You should not pay black­mail­ers” in the Ex­pert magazine opines that the EU’s will­ing­ness to suc­cumb to U.S. pres­sure and im­pose sanc­tions against Rus­sia could turn out to be a se­ri­ous strate­gic blun­der.

The au­thor writes that Brus­sels is forc­ing Vladimir Putin to make a choice: to give up the pro­tec­tion of na­tional in­ter­ests and undo all the achieve­ments of Rus­sian diplomacy in re­cent years, or en­ter into a se­ri­ous con­fronta­tion with the West. “It is easy to guess which op­tion, in this case, the Rus­sian pres­i­dent will choose,” says Ex­pert.

The magazine warns that these sanc­tions will also hit Europe as well. Gazprom will re­main a vi­tal sup­plier of gas to Europe, says Ex­pert.

The magazine warns of the dam­age that the West will suf­fer from the sanc­tions: “The U.S. and Europe are push­ing hard to move Moscow to­wards Bei­jing. For China, which is pre­par­ing to do bat­tle with the U.S. for South-East Asia, an al­liance with Rus­sia would be ex­tremely ben­e­fi­cial – it would cover the Chi­nese rear, as well as pro­vid­ing a smooth flow of re­sources for the Chi­nese econ­omy, with­out any tran­sit risks.”

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