Tag Archives: Sanctions

How Long Can Russia Hold Out? (Revised)

As the US and other leaders of the now G7 group of nations have shunned Russia and its antics in Ukraine, a clear message is being sent to the former Soviets: change your actions or there will be severe consequences. A few weeks ago the G7 agreed to economic sanctions of Russian energy, finance, banking, and weapons industries until the country backed off of its annexation of Crimea. Instead of the G8’s annual meeting in Sochi this upcoming June, the now G7 will instead travel to Brussels and have their meeting there. (WSJ)

The question now I believe is to what extent will these sanctions be successful and how does that compare with other economic damage being done purely due to the political and economic unrest created by Putin’s actions. What I am getting at here has to do with the cost benefit analysis of the sanctions. For the US, as explained in this WSJ article, sanctions against Russia really would not have much of an effect as only 1% of annual US trade occurs with Russia. The meat of the sanctions would come from European countries and as shown by the following graphic, could hurt Europe as much as they do Russia:

Screen Shot 2014-03-24 at 10.15.46 PM

With almost 160 billion euros worth of oil and gas sent to the European Union in the first 9 months of 2013, there is substantial demand that would have to be gotten elsewhere if the EU were to in fact, sanction like the G7 is talking about. It is also unfortunate for the EU that over 15% of their gas needs come through Ukrainian pipelines that Russia could feasibly have some sort of control over now as well. Russia is the EU’s 4th largest trading partner and has substantial banking and automotive ties in the EU countries to boot. So obviously the G7 has something much more complicated than just sanction and wait going on here.

The good news here though, is that the G7 may not even have to impose as extreme of measure as are being talked about due to the unrest in the financial markets in Russia. As news broke of the tense situation back towards the beginning of March, Russian stock indexes dropped as far as 10% in a single day and have continued falling since. These are accompanied by massive losses in value in the Russian Ruble and the MICEX Russian Index (not hedged against losses in currency value) has fallen to almost 30% losses on the year at points. Accompanied by massive capital outflows from Russia and it becomes feasible that Russia could enter a recession without the US or the G7 ever having to do anything more than threaten to sanction. (Bloomberg) This is the most interesting part of the whole story I think, that while these threats of sanctions can be quite complicated as well as costly, there is really nothing as clear as Russian oligarchs losing over 20% of their wealth as quickly as Putin can send troops to the Ukraine.

Another factor, albeit a longer term issue, that stands in front of Russia is the shrinking cost of oil with the US becoming energy independent as well as the continual development of new alternative fuels. In a recent Barron’s article, economists from Citigroup talked about how the continual rise of production of oil in the US and elsewhere and this decreasing demand due to the ability for engines to run on alternatives, could lead to oil price averages around $75 a barrel rather than the traditional $90 to $100 range (Barron’s). This alone should make Russia think twice about its aggressive political movements of late, because alternative fuels like LNG exportation and solar energy just became a much bigger threat to Russia’s future monetary prospects. The lasting implications of aggressive moves such as these for the country are the expedited development and use of other fuels. This would leave Russia’s economy in complete shambles as that is their primary source of revenue.

The next time Mr. Putin asks his friends for a little money from the private sector and they do not have it, he may come to regret the path he has taken here on the Ukraine. The implications of his actions could be longer lasting than he realizes and the stakes for the Russian economy could be much higher than just a few months of sanctions.

How Long Can Russia Hold Out?

Today, as the US and other leaders of the now G7 group of nations shunned Russia and its antics in Ukraine, a clear message was sent to the former Soviets: change your actions or there will be severe consequences. The G7 agreed to economic sanctions of Russian energy, finance, banking, and weapons industries until the country backed off of its annexation of Crimea. Instead of the G8’s annual meeting in Sochi this upcoming June, the now G7 will instead travel to Brussels and have their meeting there. (WSJ)

The question now I believe is to what extent will these sanctions be successful and how does that compare with other economic damage being done purely due to the political and economic unrest created by Putin’s actions. What I am getting at here has to do with the cost benefit analysis of the sanctions. For the US, as explained in this WSJ article, sanctions against Russia really would not have much of an effect as only 1% of annual US trade occurs with Russia. The meat of the sanctions would come from European countries and as shown by the following graphic, could hurt Europe as much as they do Russia:

Screen Shot 2014-03-24 at 10.15.46 PM

 

 

 

 

 

 

 

With almost 160 billion euros worth of oil and gas sent to the European Union in the first 9 months of 2013, there is substantial demand that would have to be gotten elsewhere if the EU were to in fact, sanction like the G7 is talking about. It is also unfortunate for the EU that over 15% of their gas needs come through Ukrainian pipelines that Russia could feasibly have some sort of control over now as well. Russia is the EU’s 4th largest trading partner and has substantial banking and automotive ties in the EU countries to boot. So obviously the G7 has something much more complicated than just sanction and wait going on here.

The good news here though, is that the G7 may not even have to impose as extreme of measure as are being talked about due to the unrest in the financial markets in Russia. As news broke of the tense situation back towards the beginning of March, Russian stock indexes dropped as far as 10% in a single day and have continued falling since. These are accompanied by massive losses in value in the Russian Ruble and the MICEX Russian Index (not hedged against losses in currency value) has fallen to almost 30% losses on the year at points. Accompanied by massive capital outflows from Russia and it becomes feasible that Russia could enter a recession without the US or the G7 ever having to do anything more than threaten to sanction. (Bloomberg) This is the most interesting part of the whole story I think, that while these threats of sanctions can be quite complicated as well as costly, there is really nothing as clear as Russian oligarchs losing over 20% of their wealth as quickly as Putin can send troops to the Ukraine.

The next time Mr. Putin asks his friends for a little money from the private sector and they do not have it, he may come to regret the path he has taken here on the Ukraine.

 

Weak Economic Sanctions Likely Will Have No Effect on Russia

Yesterday marked a big day in world history as Crimea voted in favor of seceding from Ukraine in order to join Russia. The annexation of Crimea will be the biggest annexation of a European territory in many decades. The vote came with a lot of opposition from the United States and the European Union, as both parties made announcements of sanctions to be carried out against Russia. President Obama’s first round of sanctions included the “blacklisting” of seven Russian politicians and four Ukrainian politicians believed to have supported the annexation of Crimea. The European Union responded with the blacklisting of 22 Russian politicians, with four being listed by both parties. Putin and his cronies responded to these light sanctions with laughter. Vladislav Surhov, a Putin aide who was blacklisted by the United States, responded to news of his sanctions by saying, “What interests me about the United States are Tupac Shakur, Allen Ginsberg, and Jackson Pollock. No Visa is needed to access their works. So I’m not missing anything.” Many of those “blacklisted” aren’t believed to have any foreign assets, so the effects of this first round of sanctions are extremely minimal. (WSJ – Russia Moves Closer to Absorbing Crimea, Despite Sanctions)

As a result of the weak sanction proposals announced by the US and the EU today, it is believed that Putin will make an announcement tomorrow in Moscow announcing the absorption of Crimea. The US and EU will likely respond to this announcement with stronger rounds of sanctions against Russia. Currently in Washington there is legislation being drafted to broaden the sanctions to any company doing business with any blacklisted Russian individual or company. The current proposal is very similar to the sanction proposal announced in 2007 by the Bush Administration against Iran. The sanctions imposed against Iran effectively reduced Iran’s oil exports by half and froze the international banking system in Iran, effectively crippling the Iranian economy. Despite the similarities in sanction proposal, any proposal will likely be limited due to Europe’s reliance on Russian trade.

According to Eckhard Cordes, the Chairman of Eastern Committee of German Business, “Tough economic sanctions would quickly weaken not only the Russian economy, but also Europe’s economy.” Over the past two decades many European firms have invested billions of dollars into Russia to take advantage of a European market with robust growth opportunities. As a result many of Europe’s largest firms, such as BP, Societe General, Danone, and Royal Dutch Shell, have significant assets in Russia that they rely on for a large portion of their revenue. As a result of the influence of many large European firms, it is hard to see any significant sanctions being enacted against Russia. As put simply by Frederic Oudea, the CEO of Societe General, “both regions have too much to lose.” This belief was portrayed in the markets today as many of these companies with large exposure to Russia traded up. (WSJ – Response to Crimea Vote Sets Western Companies on Edge) Simply put it is believed that the self-inflicted costs of sanctions far outweigh any benefits from the sanctions.

Furthermore, the announcement of the sanctions seemed to have minimal constrains on firm investments in Russia. Despite Ford announcing that they will be seeking consulting on their investments in Russia, many analysts said that they believe further sanctions will not affect many European firm’s ability to collect revenue on their Russian assets. Overall, the current sanctions, as well as Europe’s reliance on Russian trade, seem to be forecasting all impending threats towards Russia as discredited. Unless, the EU is willing to take economic concessions in order to sanction Russia it seems unlikely that they can provide Russia with a credible threat. As the EU continues to move through their recovery, it seems unlikely that they would make any sanctions that would jeopardize their economic recovery.