New US Sanctions May Have More Serious Consequences Than the Previous Ones

It is to be reminded that packages of sanctions by the US, Australia, Canada, New Zealand and the EU approved before July 2014 included measures which concerned, primarily, freezing of assets and introduction of visa restrictions for individuals and a ban on companies from the above countries to maintain business relations with individuals and entities included in the list.

In addition to the above, the political situation imposed substantial limitations on participation by the Russian Federation in a number of international organizations and institutions, such as the OECD, the NATO, the Council of Europe, the European Organization for Security and Aeronavigation, G8 and the EBRD.

The new sanctions may cause damage to development of Russia's real sector of the economy and concern such Russian corporations as the Novatek, the Rosneft, the Vneshekonombank and Gazprombank. In particular, the US closed access to the above companies to financial markets having banned equity and debt financing for the term of over 90 days by US individuals and legal entities. If earlier the US restrictions concerned mostly cooperation with Russian companies, at present the introduced measures have created barriers for the real sector which is in need of an access to mid-term and long-term instruments of financing offered by the US financial sector.

The measures taken by US and European partners – imposition of restrictions in respect of individuals and reduction of volumes of investment, trade and technical cooperation – weakened the Russian economy and contributed to a drop in GDP growth rates to 0.5%, capital flight (up to $100bn in 2014) and depreciation of the ruble exchange rate. The new sanctions made the Russian economy even more vulnerable in general and complicated things on the Russian financial market, in particular. So, in the morning on July 17 in response to the new package of sanctions the МICEX index fell by 2.46%, while the RTS index, by 3.29%. It is to be noted that as it should be expected the largest damage was caused to equities of companies (the Novatek and the Rosneft) against which sanctions were introduced.

Russian corporations need on a quarterly basis to attract up to $30bn for refinancing of their debts. That problem is particularly acute for the Gazprombank and the Rosneft which have current liabilities. It is to be noted that the share of US investors on the market of Russian euro-debts will gradually decrease due to a ban on purchasing of equities and bonds of the companies which were included the sanction list. Undoubtedly, high demand on debt financing can be met by investors from countries with rapidly growing economies. However, for new players to come to the market additional time will be required to change the pattern of the financial market.

However, for some companies the course of developments appears more determined than for the Russian economy in general. So, the sanctions introduced do not break completely the economic ties of those companies, nor freeze their accounts or bar short-term lending to them. At the same time, growing risks related to Russian assets contribute to extension of the period of uncertainty for the Russian economy in general: foreign loans become more expensive, currency risks are getting higher, while the financial state of industries is worsening.

Due to the above, attraction of investors from countries with rapidly growing economies is justified. A substantial move in that direction was taken by Russia at the 6th BRIC Summit within the frameworks of establishment of a New Bank for Development which could become a source of long-term funding both for the public and private sectors.

Yuri Zaitsev, Researcher