Page 50 - bne_Magazine_September_2017

50 Opinion COMMENT:
How will the new US sanctions affect Russia’s economy?
Aleksandr Valchyshen in Kyiv
How will the new US sanctions affect Russia’s economy? The US has finalised the introduction of new sanctions against Russia, Iran and North Korea and promoted
it as a profound new step towards undermining the Russian economy. Is this the case?
In my view, the latest package of sanctions remains too weak as an instrument to punish the aggressive international behaviour of Russia’s leaders.
For instance, the financial sector will see a certain reinforcement of last year’s restrictions and sanctions against the use of America’s financial system. This can make it more difficult for the Russians to use financial innovations to show the international community how well they are doing and to accelerate the recovery that started this year.
Some examples of such financial innovations include complex international transaction schemes; the biggest one was implemented by the Russians in the recent “privatisation” of a 19.5% stake in Rosneft.
The financial press was surprised to find out that VTB bank, an entity under sanctions, was part of the international consortium (with the Swiss company Glencore, Qatar Sovereign Wealth Fund and the Italian bank Intesa) in the sale of a state-owned stake that ended up in the hands of undeclared private investors.
Another step to counter the sanctions was the issuance
of sovereign Eurobonds by the Russian government
that generated significant interest among international investors but which was based on the local Russian financial infrastructure. Once again, VTB Capital investment bank, an entity under sanctions, is engaged.
Even though the current sanctions do not prohibit American investors from buying Russian government debt or trading with VTB, the mere act of placing sovereign bonds with American investors is presented as a sign of the weakness of the sanction regime by Russia’s government.
www.bne.eu
bne September 2017
Aleksandr Valchyshen, Head of Research at ICU
The new package of sanctions allows the introduction of a ban on investment in Russian sovereign debt, including “the full range of derivative products”, by American citizens and financial institutions.
This ban was not introduced automatically after the law takes effect. It may (!) come into effect after Congress’ public discus- sion of the joint report by the US Department of the Treasury, Department of State and Director of National Intelligence.
But the new sanctions are not a critically fatal blow to Russia’s economy. However, it could create a new brief wave of volatility on the foreign and domestic market of Russian sovereign bonds. The strategic vector in the development of the Russian economy
is the domestic financial system. Therefore, sanctions will only boost transition to it and further reduce the reliance of the Russian government and companies on the international capital market.
It is important to recall the history of the Russian Eurobond market, or something known today as the international debt market. It appeared in the 1960s and was largely based on what remained of the Soviet government’s deposits in the American bank system in US dollars. One of the key impulses leading to the emergence of this market, a serious innovation in itself, was the desire of the Soviet government to avoid control by the US Federal Reserve while retaining continued revenues. Moscow Narodny Bank (MNB), the Soviet bank based in London, played the leading role. Eventually, more players got involved in the market, turning it into a full- fledged element of the international financial system. Thus, Russian financial engineering has a long tradition of adapting and finding bypasses when faced with pressure from external restrictions.
In the 1960s, the geopolitical situation was no less complicated than it is now: 1962 saw the Cuban Missile Crisis and 1968 saw the Soviet invasion of Czechoslovakia. America responded with sanctions back then too: for example, it froze Russia's US dollar-denominated assets held at MNB in London. This was a serious step: the London branch of MNB was the major (if not the only) settlement bank for trade with the West for the Soviet Union and other states of the Socialist bloc. The