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bne March 2020
chief economist Elina Ribakova and her colleagues, Benjamin Hilgenstock, Greer Meisels and Stefan Gringel, wrote in
their report.
The IIF argues that the US sanctions imposed on Russia after the 2014 annexation of the Crimea peninsula was a “paradigm shift” as they proved effective in limiting the flow of foreign funding into the country, forcing substantial fiscal adjustment and the deleveraging of corporates. “Partially as a result of sanctions, GDP growth has remained underwhelming for many years,” the IIF concludes.
2018 saw several rounds of sanctions imposed on Russia, although apart from those targeting oligarchs in April, the rest were mild. The most recent sanctions were slapped on Russia to stymie the completion of the Nord Stream 2 gas pipeline at the end of last year and only last week limited fresh sanctions were placed on state-owned oil major Rosneft to punish it for helping Venezuela dodge its own US sanctions and export oil to the international market.
The new sanctions under discussion by the US Congress could target investments into Russian domestic sovereign debt, the Russian Ministry of Finance's ruble-denominated OFZ treasury bills, which have performed extremely well in recent years and are widely held by US investors.
“However, it is far from certain that further sanctions targeting external funding would have the desired effect. The Russian economy is in a dramatically different place now compared
to 2014: the country’s economic institutions are credible, macroeconomic vulnerabilities are extremely low, and buffers such as foreign reserves have been built up. Additionally, Russian debt plays an important role in the international financial system, so the range of unintended consequences
is potentially large,” says the IIF.
The last time the US tried to impose harsh sanctions in 2018 by targeting companies belonging to oligarch Oleg Deripaska in the April 6 round of sanctions that year, the complete ban on doing any business with his companies
or owning any securities sent up a howl of pain amongst western investors to the point where these sanctions were eventually withdrawn nine months later. It turned out that the Rusal aluminium plant was too deeply integrated in the global economy and these sanctions caused chaos on the international metals market that threatened to boomerang back on the US economy.
New sanctions on the cards
There are two new bills on the table that could be implemented: Defending American Security from Kremlin Aggression Act of 2018 (DASKA) and the Defending Elections from Threats by Establishing Redlines Act of 2018 (DETER).
DASKA targets bonds issued by the state and could include the all-important domestic OFZ treasury bills. DETER is far
Opinion 49 broader and could be used to sanction any debt issued by any
entity if it can be shown to be “controlled by Russia”.
There are three main ways sanctions could hurt Russia. First is by restricting its ability to borrow they could force the government to raise taxes. An alternative source of funds is to cut back on imports to create revenues from the balance of payments on trade. And the last option is to tap the balance sheets of state- owned enterprises (SOEs) by forcing them to deleverage.
The IIF says that the 2014 sanctions were particularly effective as at the time the Russian corporates and banks were heavily reliant on foreign borrowing (largely in dollars) and so both the balance of payments and balance sheet mechanism came into play after these banks and companies were effectively cut off from international financing.
That was six years ago. Since then the Kremlin has been working very hard to sanction-proof the Russian economy by building a “fiscal fortress”.
“The Russian economy of 2020 is in a much stronger position than it was after the 2014 sanctions were imposed. The ruble has been allowed to float freely since 2014 and functions as a key shock absorber. Russian corporates were forced to deleverage following their loss of access to external financing and are now significantly less reliant on such funding sources. Furthermore, both current account and fiscal balance are in surplus. Finally,
External liabilities have fallen sharply
Source: Central Bank of Russia, IIF
public debt is low (12.3% at the end of 3Q19), external borrowing is small, and FX reserves are the second largest after China,” says the IIF, which concludes that Russia has successfully insulated itself from the worst impacts of any new sanctions.
One of the biggest changes has been the health of the budget. In 2015 the consolidated federal budget deficit peaked at 7.6% of GDP and the domestic markets alone were simply not big enough to fund the gap. Cut off from international borrowing the finance ministry faced a crisis in 2016, unable to fill
a RUB2 trillion hole in the budget. The problem was solved
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