By Stelios Papadopoulos
The confrontation between Russia and the West entered a new phase in the final week of July, with the United States and the European Union taking by far the strongest international steps yet against Moscow over its support for Ukraine’s rebels.
The new EU and US sanctions restrict sales of arms and equipment for the oil industry, while Russian state banks are barred from issuing long term debt in Western capital markets.
In addition the European Commission published the names of eight Russians, including some of President Putin’s associates, and three companies that will have their assets frozen as part of the sanctions.
The sanctions are the first to target broad economic sectors of the Russian economy as opposed to earlier responses which targeted a small number of institutions and prominent Russians and Ukrainians with travel bans and asset freezes.
However the measures included concessions to help various European states. A controversial $1.2 billion French contract to built and export two Mistral helicopter carriers to Russia will be unaffected.
EU subsidiaries of Russian banks with units in seven EU countries are exempted from the sanctions. Russia’s oil industry has been targeted but its natural gas, which powers European industry and lights European cities, has been spared.
More importantly it is national authorities who will determine precisely how to apply the sanctions and interpret its restrictions.
According to the EU‘s official journal (“Council Regulation (EU) 833/2014 of No. July 31 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine”)when deciding on requests for authorisations “the competent authorities shall not grant an authorisation for exports to any natural or legal person, entity or body in Russia or for use in Russia, if they have reasonable grounds to believe that the end user might be a military end user or that the goods might have a military end use” (Article 2, paragragh 2).
The same paragraph states that “the competing authorities may, however, grant an authorisation where the export concerns the execution of an obligation arising from a contract or an agreement concluded before August 1 2014.”
The exact same conditions also apply for technologies for projects pertaining to deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects.
Consequently, member states may have “reasonable grounds” to believe that the end user is not a military end user.
In addition and as stated above, there is leeway for applying the sanctions only to future contracts and not existing ones.
Regarding the financial sanctions, article 5 essentially prohibits state owned banks from issuing long term debt in western capital markets (namely securities and money market instruments with a maturity exceeding 90 days) after August 1 2014, restricting them thus too to future and not existing contracts.
Furthermore the document does not say a word about syndicated loans (namely large loans funded by multiple banks and used for large infrastructure projects) while access to short-term debt is assured.
Furthermore Russian banks do not have much debt maturing in the coming months. They have roughly 39 billion dollars of debt held outside Russia maturing in the next nine months, equivalent to eight per cent of their cash reserves, according to Nomura.
That suggests refinancing risks are manageable. According to Vladimir Osakovskiy, Russia economist at Bank of America Merrill Lynch, “…such low exposure limits the potential of debt-market deterioration on the banking sector, at least in the short term”’.
The current sanctions therefore do not essentially differ in substance from past sanction regimes.
This is not surprising given the extensive economic ties Europe and Russia have created over the last decade. However the sanctions document states that the current measures “may be supplemented by other restrictive measures, in light of developments on the ground”. Is this likely?
No one can say for sure at the moment given the escalation of the conflict in Ukraine, but if one observes the EU’s reactions after Russia’s ban on a range of Western food imports and a possible intervention in eastern Ukraine under the guise of a “humanitarian intervention”, the answer is negative.
Following Russia’s embargo this week on Western food imports, the EU decided to hold meetings next week to determine how best to help EU farmers diversify away from Russia.
One could argue that the Russian ban will damage Russian consumers far more than Europe, and the EU is taking this into account. Yet this is unclear given Russia’s options. Specifically, Russia can substitute EU agricultural imports with Latin American, Iranian and Turkish agricultural imports.
The current sanctions only serve to show the Americans that the EU is tough on Russia. At the same time they allow Europeans to buy time since they only apply to future contracts. Until the downing of the MH 17 Europeans were, as already pointed out, reluctant to escalate the sanctions.
What factors forced a change of course? The downing of Malaysia airlines did play a part, but since July the United States has stepped up pressure on European banks by penalising those that do not abide by American sanctions.
A German executive cited by Spiegel stated that “Business with Russian banks on the US list has virtually ground to a halt.” Consequently the recent 9 billion dollar fine on French bank BNP Paribas-which had violated US sanctions against Iran, Cuba and Sudan-comes as no surprise.
Stelios Papadopoulos is a political risk analyst and researcher at Wikistrat with a MSc in political economy from Manchester University. He was formerly with Bradbury’s Global Risk Partners