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Opinion
May 4, 2018 www.intellinews.com I Page 28
new sanctions forbid US investors from owning existing securities and gave them just 30 days to sell (the deadline is May 7).
The upshot as been chaos on the aluminium market where prices soared to record highs, and wails of pain from US pension funds, among others, that not only hold these securities, but following Russia’s upgrade to investment grade earlier this year, have to own some Russian assets.
It has taken two weeks, but the US Treasury Department (USTD) that oversees the sanctions regime was forced into an inglorious climbdown this week and has given investors five months to unwind their positions, which will still be hard as the problem remains: who are you going to sell them to?
But the sanctions seem to have worked if their goal was to change Russia’s behaviour. Russian President Vladimir Putin has ordered his media machine to tone down its anti-American rhetoric and the buzz of diplomatic activity suggests that both sides are looking to find a new deal. This was no Pyrrhic victory for the US after all, but has been an expensive one, so expensive that the USTD is unlikely to extend sanctions to more oligarchs for the time being.
How much have the sanctions cost Russia? It’s hard to say. Russia’s oligarchs immediately had $16bn wiped off their wealth as stocks fell in panic selling after the sanctions were announced, but the stocks have since recovered much of the ground lost.
This week the Central Bank of Russia (CBR)
said that the banking sector will lose RUB100bn ($1.6bn) as a direct result of the sanctions, due
to revaluations and currency effects. But if you start adding in the IPOs and SPOs that are already being delayed and the investment that won’t come the cost is a lot higher. bne IntelliNews totted up some obvious costs in an editorial recently and came up with the number: $150bn.
Russia can weather a blow like that. It has $450bn in gross international reserves (GIR) and with oil at about $75 per barrel, after the deleveraging and cost cutting of the last three years Russia
Inc is back in profit; the country can live without international financing and as such is sanction- proof. Indeed the irony is thanks to the sanctions the value of Russian debt has plummeted so Russian companies have started to buy back their bonds at bargain bucket prices, which makes them even more resilient to sanctions than before. This week oil major Lukoil announced it was buying back $1.5bn worth of its own bonds.
Europe’s Pyrrhic victory
Both Putin and Trump are willing to pick up these huge bills in their geopolitical standoff. The big loser in all this is Europe, which is facing a Pyrrhic victory in a war it didn't start.
The Russian-German Foreign Trade Chamber has just conducted a survey of 154 companies working in Russia and concluded sanctions could cost these leading companies €1.5bn.
"Short-term losses are estimated by the survey participants in the current fiscal year in the hundreds of millions of euros, and may amount to €377mn." The medium-term losses will amount to at least €820mn, according to conservative estimates. In the worst case scenario, it may total almost €1.5bn, the report said.
This is just the direct cost of sanctions. When you start counting in all the secondary affects, like the bne IntelliNews calculation, you quickly get to a figure that is ten times the size. Both the Kremlin and Brussels have estimated the cost of the retaliatory agro-sanctions imposed on Europe by Russia at some €100bn in lost revenues, jobs and the like – a number that is based on the fall by a third in Russian-EU trade since the crisis began with the annexation of Crimea in 2014.
Unlike the US, Europe doesn't have a military- industrial economy but is dependent on free trade and profits. It can’t and won’t weather protracted