Will Russia feel the pinch from sanctions?

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.”