Wednesday, July 30, 2014

Russia/EU/US: Update--The Coalition Will Prevail Only If the Europeans Don't Get Cold Feet

According to The Associated Press, US and European sanctions against Russia's energy and finance sectors are strong enough to cause deep, long-lasting damage within months unless Moscow persuades the West to repeal them by withdrawing support for Ukrainian insurgents.

The US and European Union released details Wednesday of new sanctions aimed at hurting Russia's economy without doing undue damage to their own trade interests, punishment for alleged Russian support for Ukrainian rebels and Russia's annexation of the Ukrainian peninsula of Crimea.

The sanctions go further than earlier penalties by broadly limiting the trade of weapons and of technology that can be used in the oil and military industries. The EU also put its capital markets off-limits to Russian state-owned banks.

Also, consortium blacklisted three more companies and eight additional individuals, bringing the total to 95 people and 23 entities that have been hit with EU-wide asset freezes and travel bans. They include three close associates of President Vladimir Putin: his former judo partner Arkady Rotenberg, and the two largest shareholders of Bank Rossiya; Yuri Kovalchuk and Nikolai Shamalov.

Experts said the sanctions wouldn't have a tremendous impact in the short-term, but if left in place for months will eventually stifle development in the Russian economy and sap its financial sector. Already, economists have revised downward their predictions for Russian growth this year, with some saying the country will go into recession.

The biggest immediate impact is likely to come from the financial sanctions. US officials said roughly 30% of Russia's banking sector assets would now be constrained by sanctions.

COMMENT: Considering that the US has less to lose than the EU, logically thinking, if the sanctions are to be effective, they must be continued for at least a year, so that Putin will be forced to dig into the bank to continue to fund his imperialism in the Ukraine.

"State-owned banks are the core of the Russian banking system," said Vladimir Tikhomirov, chief economist at financial services group BCS. He noted the banks are already having trouble raising money. "That would mean their ability to lend to other banks, smaller banks, is going to be more restricted also."

Last year, about a third of the bonds issued by Russia's majority state-owned banks--7.5 billion euros ($10 billion)--were placed in EU financial markets, according to EU officials.

The measures against Russian banks, which exempt short-term borrowing, are meant to inflict just enough pain without causing them to collapse.

The key will be how long the sanctions stay in place.

In the longer term, the sanctions could hurt by fostering a climate of uncertainty, something investors loathe. Some foreign investors are likely to stay away from the sanctioned companies.

Already, as the Ukraine crisis deepened, Russia's Central Bank has been forced to raise interest rates several times to stabilize the currency as foreign investors sold it off; investors are expected to pull more than $100 billion out of Russia this year.

Rising rates hurt the economy by making borrowing more expensive; VTB bank chairman Mikhail Zadornov told "The Financial Times" that the company's retail arm cut new loans to small business by 20% in the first half of 2014.

An Associated Press-GfK poll conducted just before the latest expansion of sanctions found 53% of Americans felt the US had not gone far enough in sanctioning Russia, up from 41% who felt that way in March.