Open Europe : What will the impact of stage three sanctions be and how might Russia r

Politics.be · 2 augustus 2014, 14:00

Key pointsImpact on Europe: UK to bear the largest burden. Between 2004 and 2012 Russian firms raised $49bn on the London Stock Exchange (LSE), of which $16.4bn was raised by state-owned Russian banks (Sberbank and VTB). The burden will be manageable since revenue from financial services to Russian firms accounts for only 1% of UK exports in this area.Impact on Russia: State-owned banks such as VTB and Gazprom have to rollover at least $6bn worth of foreign currency debt in the next 18 months – funding costs will be increased but other markets likely to remain open. Indirect impact will be much larger as reluctance to do business with Russian firms or in Russia increases. Russian entities have $85.4bn in external debt to rollover in the rest of 2014 alone, while capital outflows have totalled $75bn in the past 6 months alone. The Russian economy could find itself short of credit and liquidity, although its sizeable international reserves ($478bn) will help.Russian retaliation: Russia will likely further alienate the Ukrainian economy and destabilise the situation on the ground. This could prompt Ukraine to request a further bailout from the West, totalling double digit billions. Russia could also respond with its own sanctions on Western firms and may even consider asset freezes or seizures. Further escalation could also see Russia leverage its position as Europe’s main gas supplier – either through price hikes or disrupting transit through Ukraine – to hurt the EU economy.

1. What will the impact of the financial sanctions be on Europe and on Russia?

1.1 Impact on Europe and the UK
As we have noted before, this burden will mostly be borne by the UK. Between 2004 and 2012, Russian firms raised $49bn on the London Stock Exchange (LSE), of which $16.4bn was raised by state-owned Russian banks (Sberbank and VTB). However, as the graphs below show, this has been dwindling in recent years. De facto it would be difficult and unlikely for any large Russia issuance to take place in Europe given the current climate – the sanctions therefore simply formalise this. Moreover, the fees generated from services such as these provided to Russian firms, only tend to account for a small percentage of UK’s services to foreign firms. The fees lost from sanctions on specific state-owned firms are likely to be manageable.

1.2 Impact on Russia
The impact in Russia is limited to a few banks that are state-owned: Sberbank, VTB, Gazprombank, VEB and Rosselkhozbank. Of these, the first two will be hardest hit, since they both have listings on the LSE (their main market remains MICEX). The last two are essentially entirely state owned and funded, while Gazprombank can rely on the sizeable banking of its parent company’s income and cash buffers (despite having to roll over a number of ‘eurobonds’ in coming years). VTB in particular faces a challenge rolling over its sizeable dollar denominated debt in the coming year(s).
As the charts show, most of the banks that issue bonds internationally have already dipped their toe into other currencies and capital markets. As such, the response of countries such as China and Singapore to the sanctions will be important. It seems likely banks will still be able to raise capital in these markets.
The most likely outcome of these sanctions is higher funding costs for these banks and an erosion of any cash buffers – this extra cost will likely total in the tens of millions or low hundreds of millions of dollars. Ironically, the sanctions may actually have had a larger impact if these banks were listed under ‘stage two’, where they would have faced asset freezes and travel bans, making it almost impossible for them to do any business in the EU.

Some may also look to the Russian state and central bank for funding. As the chart below shows, Russia’s sizeable international reserves give it a good buffer to deal with any crisis. Interestingly, during the global financial crisis, when Russia’s economy was contracting by 8%, only around $220bn in reserves were eaten up. This highlights that Russia can deal with a sharp shock. However, the sanctions are more likely to have a lasting, grinding impact, which may have a different effect.

1.3 Indirect impact
The direct financial impact on both Europe and Russia is likely to be fairly limited. However, the indirect impact on Russia may be larger. We are likely to see greater capital outflows, which have already totalled $364bn since the financial crisis. There is also likely to be greater stock market (MICEX) and Ruble volatility – this will cause more pain for already flagging Russian economy.More generally, we are likely to see firms and investors hesitant to do business with Russia. In particular, this could be a problem in terms of ordinary lending. Russian firms have a significant amount of external debt, mostly in the forms of loans, to rollover - $85.4bn in the rest of 2014 alone. Russian state owned banks also have $114bn worth of foreign deposits. If these loans dry up and foreigners begin to withdraw deposits from the sanctioned banks, it could cause a serious lack of liquidity and capital in the Russian economy.

2. How might Russia react?
The response to the hard talk on sanctions has been mixed. Despite some positive early signs in terms of supporting an international investigation into the MH17 crash the two sides have drifted apart, hence the ramping up of sanctions.

2.1 Further Ukrainian bailouts?
One of the key tools will likely be for Russia to further cut off the Ukrainian economy (both by directly reducing trade and also by supporting on-going fighting and instability in the country). Ukrainian GDP contracted by 1.1% in the first quarter of 2014 and by 2.3% in the second quarter – meaning it has already overshot the IMF forecast of 3% contraction this year. In general, it is far from being on track with its current bailout programme.

Russia could utilise its position to force Kiev to seek further financial aid from the West. This could result in further bailouts for Ukraine totalling double digit billions. As the graph below shows, Ukraine has substantial gross financing needs which are currently slated to be funded by: trade credit, investment and rolling over of private sector debt. All three have become increasingly difficult given the prolonged political and economic uncertainty. Politically, further bailouts will be a difficult sell in struggling eurozone states but also to emerging market IMF members, who may not support the sanctions.

2.2 Other options for retaliation

Retaliate with their own sanctions, particularly against assets held in Russia by large Western firms including oil giants such as BP, Shell and Total. As the graphs above show, there is a sizeable stock of Foreign Direct Investment in Russia (the UK’s amounted to £46bn in 2011). This would remain an extreme option.
Diversifying energy partners, in particular striking bilateral deals with China – this has already begun with the $400bn deal between China and Gazprom, but this remains a very long-term strategy and a relationship which China looks set to dominate.
Leverage its energy power. This would be a risky approach given that Russia remains reliant on income from energy exports. However, Putin has shown himself willing to use this option if necessary (see his letter to EU leaders and the fact that gas supply to Ukraine has already been cut off, which makes reducing gas transit through Ukraine a plausible next step). This could take the form of negotiating higher prices on contracts or limiting transit through Ukraine due to instability.
Help encourage eastern pullback from global political institutions – a trend which has already begun with the new BRICS bank. This could also be tied in with the de-dollarization of deals in that area. While economically this may not be a big deal, politically it will drive a wedge between developed and emerging economies.
Of course, the key question is whether this will push Putin to deescalate and return to the table. There are a few crucial issues:
The narrative in Russia around the MH17 crash has been starkly different to in the West and has increased the gap between the two sides. Putin’s hard-line stance continues to boost his public popularity. This will make it very difficult for him to shift position significantly, since he may well loose domestic support.
There is an on-going debate (or even struggle) within Russia (and the higher echelons of the Russian regime) between those who want to continue to push the nationalist agenda and take a hard-line stance against the West and the more pragmatic business driven side that wishes to deescalate and use the opportunity to build economic bridges to the West.
While the targets for Russian action may have become clearer in the short term (ensuring a fair investigation into MH17 and securing Ukraine’s borders), what Europe wants from Russia in the longer term remains unclear. It is still unclear if the EU wants to put Ukraine and similar states on the path to full membership, including security cooperation, or if it is hoping to find some looser relationship. Whatever the format, it will likely have to take account of the remaining relationship said countries have with Russia.
For more information contact Raoul Ruparel on +44(0)757 696 5823 or the office on +44(0)207 197 2333.
CIS & Russia, Statistics, London Stock Exchange: http://www.lseg.com/areas-expertise/...s-russia/stats
Eurobonds, Wholesale Borrowing, Gazprombank. Data provided in original currencies exchange rates used: CHF/USD 1.1, CNY/USD 0.16 and EUR/USD 1.34 http://www.gazprombank.ru/eng/ir/bon...obonds_eng.php. Here Eurobonds refers to bonds issued in a non-domestic currency.
VTB Group Debt maturity profile, Capital Markets, Debt Instruments, Investor Relations, VTB: http://www.vtb.com/ir/funding/
One further option which has been discussed is that these banks could use subsidiaries in Europe to help fund themselves. This remains possible since their European subsidiaries are exempt from the sanctions; however, the EU has said it will watch them very closely to ensure they are not funnelling money back to their parent companies. This will of course be tricky to enforce. http://www.bloomberg.com/news/2014-0...shut-them.html
International Reserves of the Russian Federation, Central Bank of Russia: http://www.cbr.ru/eng/hd_base/default.aspx?Prtid=mrrf_m
Net Inflows/Outflows of Capital by Private Sector in 2005 - 2013 in the First and the Second Quarters of 2014, Central Bank of Russia: http://www.cbr.ru/eng/statistics/pri...ital_new_e.htm
Payment Schedule of External Debt of the Russian Federation (As at Q1 2014); http://www.cbr.ru/eng/statistics/cre...svs&sid=vd_GVD
External Debt of the Russian Federation in national and foreign currency (Detailed Analytical Presentation), Central Bank of Russia: http://www.cbr.ru/eng/statistics/pri...&sid=itm_26066
Cited by Reuters, ‘Ukraine economy shrinks faster as conflict takes its toll’, 30 July 2014: http://www.reuters.com/article/2014/...0Q52PM20140730
IMF Staff Report on Ukraine request for a Stand-By Arrangement, April 2014: http://www.imf.org/external/pubs/ft/...14/cr14106.pdf
ONS Pink Book 2013, Part 3 Geographical Breakdown: http://www.ons.gov.uk/ons/rel/bop/un...013/index.html
Central Bank of Russia, Russian Federation: Inward Foreign Direct Investment Positions by Geographical Allocation in 2009-2012: http://www.cbr.ru/eng/statistics/pri...vs&sid=ITM_586.
For a more detailed discussion of this deal and its implications for the EU, see Open Europe blog, ‘Does Russia’s gas deal with China change things for the EU?’, 21 May 2014: http://openeuropeblog.blogspot.co.uk...na-change.html
Cited by Reuters, ‘Putin's letter to European leaders on Ukraine's gas debt’, 10 April 2014: http://in.reuters.com/article/2014/0...0N23V020140410
For more discussion see the Open Europe blog, ‘Russia suspends gas flow to Ukraine as talks fail to yield compromise’, 16 June 2014: http://openeuropeblog.blogspot.co.uk...kraine-as.html
Published by Gallup, ‘Russian Approval of Putin Soars to Highest Level in Years’, 18 July 2014: http://www.gallup.com/poll/173597/ru...vel-years.aspx

Bron: politics.be

2 augustus 2014, 14:00	#1
Politics.be Redactie Geregistreerd: 27 november 2004 Berichten: 28.704	Open Europe : What will the impact of stage three sanctions be and how might Russia r Key pointsImpact on Europe: UK to bear the largest burden. Between 2004 and 2012 Russian firms raised $49bn on the London Stock Exchange (LSE), of which $16.4bn was raised by state-owned Russian banks (Sberbank and VTB). The burden will be manageable since revenue from financial services to Russian firms accounts for only 1% of UK exports in this area.Impact on Russia: State-owned banks such as VTB and Gazprom have to rollover at least $6bn worth of foreign currency debt in the next 18 months – funding costs will be increased but other markets likely to remain open. Indirect impact will be much larger as reluctance to do business with Russian firms or in Russia increases. Russian entities have $85.4bn in external debt to rollover in the rest of 2014 alone, while capital outflows have totalled $75bn in the past 6 months alone. The Russian economy could find itself short of credit and liquidity, although its sizeable international reserves ($478bn) will help.Russian retaliation: Russia will likely further alienate the Ukrainian economy and destabilise the situation on the ground. This could prompt Ukraine to request a further bailout from the West, totalling double digit billions. Russia could also respond with its own sanctions on Western firms and may even consider asset freezes or seizures. Further escalation could also see Russia leverage its position as Europe’s main gas supplier – either through price hikes or disrupting transit through Ukraine – to hurt the EU economy. 1. What will the impact of the financial sanctions be on Europe and on Russia? 1.1 Impact on Europe and the UK As we have noted before, this burden will mostly be borne by the UK. Between 2004 and 2012, Russian firms raised $49bn on the London Stock Exchange (LSE), of which $16.4bn was raised by state-owned Russian banks (Sberbank and VTB). However, as the graphs below show, this has been dwindling in recent years. De facto it would be difficult and unlikely for any large Russia issuance to take place in Europe given the current climate – the sanctions therefore simply formalise this. Moreover, the fees generated from services such as these provided to Russian firms, only tend to account for a small percentage of UK’s services to foreign firms. The fees lost from sanctions on specific state-owned firms are likely to be manageable. 1.2 Impact on Russia The impact in Russia is limited to a few banks that are state-owned: Sberbank, VTB, Gazprombank, VEB and Rosselkhozbank. Of these, the first two will be hardest hit, since they both have listings on the LSE (their main market remains MICEX). The last two are essentially entirely state owned and funded, while Gazprombank can rely on the sizeable banking of its parent company’s income and cash buffers (despite having to roll over a number of ‘eurobonds’ in coming years). VTB in particular faces a challenge rolling over its sizeable dollar denominated debt in the coming year(s). As the charts show, most of the banks that issue bonds internationally have already dipped their toe into other currencies and capital markets. As such, the response of countries such as China and Singapore to the sanctions will be important. It seems likely banks will still be able to raise capital in these markets. The most likely outcome of these sanctions is higher funding costs for these banks and an erosion of any cash buffers – this extra cost will likely total in the tens of millions or low hundreds of millions of dollars. Ironically, the sanctions may actually have had a larger impact if these banks were listed under ‘stage two’, where they would have faced asset freezes and travel bans, making it almost impossible for them to do any business in the EU. Some may also look to the Russian state and central bank for funding. As the chart below shows, Russia’s sizeable international reserves give it a good buffer to deal with any crisis. Interestingly, during the global financial crisis, when Russia’s economy was contracting by 8%, only around $220bn in reserves were eaten up. This highlights that Russia can deal with a sharp shock. However, the sanctions are more likely to have a lasting, grinding impact, which may have a different effect. 1.3 Indirect impact The direct financial impact on both Europe and Russia is likely to be fairly limited. However, the indirect impact on Russia may be larger. We are likely to see greater capital outflows, which have already totalled $364bn since the financial crisis. There is also likely to be greater stock market (MICEX) and Ruble volatility – this will cause more pain for already flagging Russian economy.More generally, we are likely to see firms and investors hesitant to do business with Russia. In particular, this could be a problem in terms of ordinary lending. Russian firms have a significant amount of external debt, mostly in the forms of loans, to rollover - $85.4bn in the rest of 2014 alone. Russian state owned banks also have $114bn worth of foreign deposits. If these loans dry up and foreigners begin to withdraw deposits from the sanctioned banks, it could cause a serious lack of liquidity and capital in the Russian economy. 2. How might Russia react? The response to the hard talk on sanctions has been mixed. Despite some positive early signs in terms of supporting an international investigation into the MH17 crash the two sides have drifted apart, hence the ramping up of sanctions. 2.1 Further Ukrainian bailouts? One of the key tools will likely be for Russia to further cut off the Ukrainian economy (both by directly reducing trade and also by supporting on-going fighting and instability in the country). Ukrainian GDP contracted by 1.1% in the first quarter of 2014 and by 2.3% in the second quarter – meaning it has already overshot the IMF forecast of 3% contraction this year. In general, it is far from being on track with its current bailout programme. Russia could utilise its position to force Kiev to seek further financial aid from the West. This could result in further bailouts for Ukraine totalling double digit billions. As the graph below shows, Ukraine has substantial gross financing needs which are currently slated to be funded by: trade credit, investment and rolling over of private sector debt. All three have become increasingly difficult given the prolonged political and economic uncertainty. Politically, further bailouts will be a difficult sell in struggling eurozone states but also to emerging market IMF members, who may not support the sanctions. 2.2 Other options for retaliation Retaliate with their own sanctions, particularly against assets held in Russia by large Western firms including oil giants such as BP, Shell and Total. As the graphs above show, there is a sizeable stock of Foreign Direct Investment in Russia (the UK’s amounted to £46bn in 2011). This would remain an extreme option. Diversifying energy partners, in particular striking bilateral deals with China – this has already begun with the $400bn deal between China and Gazprom, but this remains a very long-term strategy and a relationship which China looks set to dominate. Leverage its energy power. This would be a risky approach given that Russia remains reliant on income from energy exports. However, Putin has shown himself willing to use this option if necessary (see his letter to EU leaders and the fact that gas supply to Ukraine has already been cut off, which makes reducing gas transit through Ukraine a plausible next step). This could take the form of negotiating higher prices on contracts or limiting transit through Ukraine due to instability. Help encourage eastern pullback from global political institutions – a trend which has already begun with the new BRICS bank. This could also be tied in with the de-dollarization of deals in that area. While economically this may not be a big deal, politically it will drive a wedge between developed and emerging economies. Of course, the key question is whether this will push Putin to deescalate and return to the table. There are a few crucial issues: The narrative in Russia around the MH17 crash has been starkly different to in the West and has increased the gap between the two sides. Putin’s hard-line stance continues to boost his public popularity. This will make it very difficult for him to shift position significantly, since he may well loose domestic support. There is an on-going debate (or even struggle) within Russia (and the higher echelons of the Russian regime) between those who want to continue to push the nationalist agenda and take a hard-line stance against the West and the more pragmatic business driven side that wishes to deescalate and use the opportunity to build economic bridges to the West. While the targets for Russian action may have become clearer in the short term (ensuring a fair investigation into MH17 and securing Ukraine’s borders), what Europe wants from Russia in the longer term remains unclear. It is still unclear if the EU wants to put Ukraine and similar states on the path to full membership, including security cooperation, or if it is hoping to find some looser relationship. Whatever the format, it will likely have to take account of the remaining relationship said countries have with Russia. For more information contact Raoul Ruparel on +44(0)757 696 5823 or the office on +44(0)207 197 2333. CIS & Russia, Statistics, London Stock Exchange: http://www.lseg.com/areas-expertise/...s-russia/stats Eurobonds, Wholesale Borrowing, Gazprombank. Data provided in original currencies exchange rates used: CHF/USD 1.1, CNY/USD 0.16 and EUR/USD 1.34 http://www.gazprombank.ru/eng/ir/bon...obonds_eng.php. Here Eurobonds refers to bonds issued in a non-domestic currency. VTB Group Debt maturity profile, Capital Markets, Debt Instruments, Investor Relations, VTB: http://www.vtb.com/ir/funding/ One further option which has been discussed is that these banks could use subsidiaries in Europe to help fund themselves. This remains possible since their European subsidiaries are exempt from the sanctions; however, the EU has said it will watch them very closely to ensure they are not funnelling money back to their parent companies. This will of course be tricky to enforce. http://www.bloomberg.com/news/2014-0...shut-them.html International Reserves of the Russian Federation, Central Bank of Russia: http://www.cbr.ru/eng/hd_base/default.aspx?Prtid=mrrf_m Net Inflows/Outflows of Capital by Private Sector in 2005 - 2013 in the First and the Second Quarters of 2014, Central Bank of Russia: http://www.cbr.ru/eng/statistics/pri...ital_new_e.htm Payment Schedule of External Debt of the Russian Federation (As at Q1 2014); http://www.cbr.ru/eng/statistics/cre...svs&sid=vd_GVD External Debt of the Russian Federation in national and foreign currency (Detailed Analytical Presentation), Central Bank of Russia: http://www.cbr.ru/eng/statistics/pri...&sid=itm_26066 Cited by Reuters, ‘Ukraine economy shrinks faster as conflict takes its toll’, 30 July 2014: http://www.reuters.com/article/2014/...0Q52PM20140730 IMF Staff Report on Ukraine request for a Stand-By Arrangement, April 2014: http://www.imf.org/external/pubs/ft/...14/cr14106.pdf ONS Pink Book 2013, Part 3 Geographical Breakdown: http://www.ons.gov.uk/ons/rel/bop/un...013/index.html Central Bank of Russia, Russian Federation: Inward Foreign Direct Investment Positions by Geographical Allocation in 2009-2012: http://www.cbr.ru/eng/statistics/pri...vs&sid=ITM_586. For a more detailed discussion of this deal and its implications for the EU, see Open Europe blog, ‘Does Russia’s gas deal with China change things for the EU?’, 21 May 2014: http://openeuropeblog.blogspot.co.uk...na-change.html Cited by Reuters, ‘Putin's letter to European leaders on Ukraine's gas debt’, 10 April 2014: http://in.reuters.com/article/2014/0...0N23V020140410 For more discussion see the Open Europe blog, ‘Russia suspends gas flow to Ukraine as talks fail to yield compromise’, 16 June 2014: http://openeuropeblog.blogspot.co.uk...kraine-as.html Published by Gallup, ‘Russian Approval of Putin Soars to Highest Level in Years’, 18 July 2014: http://www.gallup.com/poll/173597/ru...vel-years.aspx Bron: politics.be __________________ Politics.be - Jouw politieke portaalsite