According to EU proposal regarding sanctions against Russia new measure will “prohibit any EU persons from investing in debt, equity and similar financial instruments with a maturity higher than 90 days, issued by state-owned Russian financial institutions…anywhere in the world.” Is this a step that could hit Russia hard, or not and why? Read few comments.
Iana Dreyer, Trade and Energy Policy Analyst
The fact that Russian state owned companies will no longer be able to fundraise on European markets is symbolically a huge step forward as it recognises that European financial market regulators have de facto accepted the financing of Russian companies that play along in Putin’s foreign policy games and/or are an integral part of the ‘vertical of power’ in Putin (e.g. Rosneft IPO after it absorbed Yukos assets). Apart from the energy dependency problems, financial centers in Europe are one of the explanations of why the EU has not been able to come up with a firm and common answer to Russia’s policies in Ukraine. The proposed sanctions do not hurt any existing relationships/contracts, but if adopted would isolate Russia further. There is a healthy debate to be had whether isolating Russia’s economy will stop Putin in his foreign Policy adventurism. But it is not possible not to target at least the state-owned companies as part of a broader package to keep companies tied into the Putin regime from benefiting from attractive European services such as sophisticated globalised financial services without complying with fundamental international law such as respect for territorial integrity.
Anders Åslund, Senior Fellow, Peterson Institute
Yes, this would be a hard blow to the Russian state sector. According to Morgan Stanley, state-owned enterprises have $74 billion of external debt coming due in the next 12 months. Without foreign financing over 90 days, Russian state companies are being hit hard. They cannot borrow much more at home and the only international source would be china, which is unlikely to offer much. Thus, by and large, Russian state companies would have to reduce their investment, which in turn will reduce overall investment in the Russian economy, and it will reduce economic growth, which will probably turn negative.
Financially, Russia is highly dependent on international sources to about 40% of all its funding.
Sergey Utkin, Head of Department of Strategic Assessment, Centre for Situation Analysis, Russian Academy of Sciences
Since some 75% of FDI come to Russia from the EU, this might play a role. As always, details matter. One can list quite a number of
financial institutions with significant participation of the Russian state (e.g. http://www.finansoviyblog.ru/2014/02/Gosudarstvennye-banki-Rossii-Spisok-bankov-s-gosudarstvennym-uchastiem.html) – would all of them be hit or will there be an annex listing just 2 or 3 of them? They do use the capital coming from non-residents, but not necessarily from the EU. And definitely, the EU is not the only source of capital around, even if it has been the one used most by Russia so far. This could, in a way, stimulate the real ‘pivot to Asia’, people speculate so much about. In the end of the day, with relatively high prices for oil, gas and raw materials Russian economy should weather practically anything.
I don’t think there could be any but symbolic reaction on the Russian side – the EU is not dependent on Russian investments, and asymmetrical sanctions are hard to formulate so that they would be felt by the EU without hitting Russia itself.
Richard Connolly, Senior Lecturer in Political Economy, Centre for Russian and East European Studies, University of Birmingham
The short answer to your question is that the limits on lending to SO financial orgs certainly has the potential to ht Russia hard. Russian companies have already seen their borrowing on international capital markets sharply curtailed. H1 2014 international lending to all Russian industrial companies was $6.7bn, down from $26.1bn in H1 2013, while the global total was flat. International bond sales by Russian companies in 2014Q2 were $3.4bn, against $15.9bn in 2013Q2. This was before sanctions on big banks have been imposed, so I’d expect that such sanctions would make matters worse.
I also suspect that other companies (energy, defence, other) would likely be indirectly affected, as counter parties might fear that similar sanctions might be imposed on them in the future.
In short, I would expect that if such sanctions were to be applied, the effects would be significant.
Shinichiro Tabata, Professor, Slavic-Eurasian Research Center, Hokkaido University
Of course, it will hit the Russian economy hard, if it will be implemented effectively, since Russia definitely needs foreign investments for modernization of the economy. But, simultaneously, it will certainly deprive European investors of good investment opportunity. China and other emerging economies may benefit from this circumstance.
Peter Toumanoff, Associate Professor of Economic Marquette University
This is a minor sanction that may have some symbolic importance for European politicians, but it will have little effect on the Russian economy. It is difficult to enforce, because financial investments are fungible and the global capital markets permit many avenues for investments to be made if investors want to make them. It is a sanction that inflicts only minor pain, and the pain is equally divided between Russia and potential European investors. Putin’s reckless policy in Eastern Europe has already damaged foreign investors confidence, and the major harm to Russia is being felt in its exchange rate and stagnant economy. Capital flight has required Russian Central Bank policy to raise domestic interest rates, exactly what is not needed to stimulate a stagnant domestic economy on the verge of recession. Foreign exchange is already costly for Russia and non-energy sources like tourism are already drying up. In the longer run, Europe’s ongoing search for alternative sources of energy will inflict the greatest cost for Russia’s aggression in Ukraine.