US sanc­tions on Rus­sia: Should South Africa care?

Finweek English Edition - - INSIDE - BY MOXIMA GAMA

Sanc­tioned by t he US and shunned by his fel­low neigh­bours in the eu­ro­zone, Rus­sian Pres­i­dent Vladimir Putin should be feel­ing lonely and rather ne­glected at this time. But thanks to his al­lies in the five-mem­ber bloc of na­tions – in­clud­ing China, In­dia, Brazil and South Africa (Brics) – all is not lost, es­pe­cially af­ter a re­cent meet­ing in The Hague and pub­licly an­nounc­ing that it re­jects the use of sanc­tions in the Ukraine cri­sis. This could be a very brave move taken by these de­vel­op­ing na­tions, pos­si­bly a very stern way of say­ing: “One for all and all for one.” What was once an eco­nomic club, Brics now seems to be grad­u­ally mov­ing into a po­lit­i­cal and se­cu­rity stance, and is be­com­ing in many ways a counter-weight to Western-dom­i­nated blocs such as the G8 and G20.

On 16 July, Pres­i­dent Obama im­posed a new round of sanc­tions against Rus­sia by restrict­ing ac­cess to Amer­i­can cap­i­tal mar­kets for Rus­sian gi­ants like the Ros­neft Oil Com­pany and Gazprom­bank that op­er­ate world­wide – an as­sign­ment to slowly suf­fo­cate the Rus­sian econ­omy. The firms tar­geted by the cap­i­tal mar­ket re­stric­tions are some of the most prom­i­nent in Rus­sia. Ros­neft, owned by the state and headed by a long-time ad­viser to Pres­i­dent Putin, is the coun­try’s largest oil pro­ducer. Gazprom­bank is the fi­nan­cial arm of Gazprom, the mas­sive state­con­trolled nat­u­ral gas com­pany, which is also headed by a Putin ally.

These com­pa­nies will be barred from fu­ture loans with a ma­tu­rity of more than 90 days, mean­ing that they will still be able to con­duct day-to-day busi­ness with overnight cap­i­tal but will find them­selves shut out of longer-term eq­uity. This is an ex­pan­sion from the pre­vi­ous pe­nal- ties which were limited to in­di­vid­u­als in Rus­sia and Ukraine, in­clud­ing a num­ber of com­pa­nies. EU lead­ers fol­lowed and beefed up their own sanc­tions by cut­ting off lend­ing for in­vest­ment projects in Rus­sia, halted bi­lat­eral co­op­er­a­tion pro­grammes and fur­ther clamped down on com­merce with Crimea, which Pres­i­dent Putin’s govern­ment in­vaded from Ukraine in March.

This has cre­ated a mixed re­ac­tion in the mar­ket, and for­eign in­vestors are un­doubt­edly wary of Rus­sia. Al­though they have re­duced some of their ex­po­sure, they still have one foot in. This is gen­er­ally a de­bate of whether these sanc­tions ever re­ally work. Tar­get­ing Rus­sia’s largest oil com­pany could com­pli­cate the op­er­a­tions of Western oil com­pa­nies with im­por­tant in­vest­ments in Rus­sia, such as BP and ExxonMo­bil. In re­tal­i­a­tion Pres­i­dent Putin warned that West-

ern com­pa­nies could even­tu­ally risk be­ing shut out of Rus­sia’s en­ergy sec­tor.

To put things into per­spec­tive, BP, which is based in Lon­don, owns a 20% stake in Ros­neft. ExxonMo­bil, based in Irv­ing, Texas, has “a se­ries of multi­bil­lion-dol­lar ex­plo­ration projects” with Ros­neft to ex­plore for oil in the Rus­sian Arc­tic and across a wide re­gion of western Siberia. Cur­rently, Rus­sia is hold­ing over $300bn in US cur­rency re­serves. If they were to dump all of these re­serves into the world mar­ket, it would crush the value of the dol­lar and cause se­vere ill­ef­fects to the US econ­omy.

The tim­ing of these tougher sanc­tions also raises an­other de­bate; this came as Rus­sia and China signed mul­ti­ple deals in the f ields of en­ergy, trans­port and in­fra­struc­ture, in­clud­ing a $400bn deal to sup­ply nat­u­ral gas to China. The deals were signed in the pres­ence of Chin- ese Pres­i­dent Xi Jin­ping and Rus­sian Pres­i­dent Vladimir Putin in Shang­hai. A pop­u­lar on­line colum­nist in the US, Allen Roland, voiced his opin­ion say­ing: “The real is­sue here is this: the United States is get­ting very up­set that China and Rus­sia are form­ing these eco­nomic bonds that are very threat­en­ing to the neo-colo­nial­ism en­vi­sioned by the United States. The Brics na­tions are be­com­ing a real, real threat to the United States.” This may sug­gest that the Brics coun­tries no longer want to be­come part of the tyranny led by the US – they want to have their own vested in­ter­ests and their own eco­nomic ties.

Since join­ing Brics, Rus­sia has gained its own eco­nomic clout, and no longer needs the US Federal Re­serve as a means for trad­ing its cur­rency or to deal in the open mar­ket. These five coun­tries have de­vel­oped a sys­tem that has by­passed the Euro­pean and Amer­i­can mar­kets and banks, giv­ing their cur­ren­cies some kind of sta­bil­ity and a means to trade valu­able com­modi­ties, such as gold and oil. Some in­ter­na­tional mar­ket com­men­ta­tors be­lieve the ou­trage of the US govern­ment against the Rus­sian ac­tion is re­ally more out of con­cern for Rus­sia be­ing able to trade nat­u­ral gas through­out the world, with­out need­ing Euro­pean mar­kets to do so. Rus­sia was go­ing to use the na­tion of Syria and its ports as a means to ex­port, but was blocked by re­cent civil war. This led them to reach into the Crimean re­gion, to open ports so that Rus­sia can make these nat­u­ral gas trades with­out im­pinge­ment. This has con­cerned US of­fi­cials be­cause oil and nat­u­ral gas are two of the pri­mary com­modi­ties upon which the dol­lar gains value. If Rus­sia were to have free ac­cess to be able to sell nat­u­ral gas, with­out us­ing Amer­i­can cur­rency to do so, it would have a se­vere ef­fect on the US dol­lar and the US econ­omy over­all.

So, to my an­swer on whether SA could be shoot­ing it­self in the foot by join­ing forces to re­ject the sanc­tions, I would say no. In more ways than oth­ers, the unity dis­played by these na­tions re­in­forces the grav­ity of the Brics ini­tia­tive – many found it point­less, even pre­dict­ing a po­ten­tial break-up be­cause of the dis­par­ity in size and im­por­tance. But bear in mind that Brics is a group of de­vel­op­ing coun­tries who are rich in nat­u­ral re­sources that drive world economies. Such coun­tries, de­spite the risks in­volved in emerg­ing mar­kets, hap­pen to be an at­trac­tive long-term in­vest­ment – mean­ing that there is plenty of room for prof­itable upside. It has been 12 years since famed Gold­man Sachs econ­o­mist Jim O’Neill pre­dicted that Brazil, Rus­sia, In­dia and China would ex­pe­ri­ence ex­plo­sive eco­nomic growth (coin­ing the term Bric). He ended his ca­reer at Gold­man Sachs man­ag­ing $800bn as the chair­man of its di­vi­sion of as­set man­age­ment. He is now talk­ing about Mint – Mex­ico, In­done­sia, Nigeria and Turkey – a pre­mo­ni­tion that may just ma­te­ri­alise.

Pres­i­dent Putin

Pres­i­dent Obama

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