U.S. Sactions Start to Bite Russia

March 21, 2014 03:23 AM

via a special arrangement with Informa Economics, Inc.

Russia equities, financial sector impacted by sanctions

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Russia's equities tumbled as the effect of US sanctions on some of the country’s wealthiest men rippled through the financial sector. Legal experts warned on Friday that European and U.S. companies who do business with Russia and Ukraine should take action to protect themselves from the unfolding sanctions regime. Most observers now believe sanctions will be ratcheted up in the next few weeks.

On Wednesday, President Obama ordered a second round of financial sanctions over Crimea, and the EU added names to its sanctions list. Moscow responded with penalties against nine U.S. officials. Obama also signaled the potential of more sweeping measures against key parts of the Russian economy, including the oil and natural gas industries, which account for much of Russia’s exports. He said the actions could disrupt the global economy, but might be necessary because of what he described as menacing movements by the Russian military near eastern and southern Ukraine.

While Obama has ruled out direct military involvement, a senior administration official said that the Pentagon was studying whether to provide communications equipment and other nonlethal assistance to the Ukrainian military.

Meanwhile, Arseniy Yatseniuk, Ukraine’s prime minister, signed the long-delayed integration treaty with the EU at a summit in Brussels. European diplomats grappled with the prospect of economic blowback as the EU added more names to its sanctions list. Also, reports surfaced regarding potential legal challenges that make the EU wary of taking aggressive action against Russian businessmen and companies. Many do not expect the European Union to target Russian business executives because it would require additional legal criteria. During Vice President Joe Biden’s trip to Poland and the Baltic states this week, he encountered little desire for broader sanctions against Russia.

Shares tumbled for Novatek, Russia’s largest independent gas producer, part owned by Gennady Timchenko, Russia’s sixth-richest man, slipping by 9.5 percent. The French group Total holds a 16 percent stake in the company. Yields on Russian government debt also rose sharply, with 10-year benchmark Russian bond yields rising 33 basis points to 9.6 percent. Russia's Micex stock index was down after the US threatened sanctions against vital parts of the country's economy, including the financial-services, energy and mining sectors.

The U.S. also imposed asset freezes and visa bans on senior Russian officials and businessmen close to Vladimir Putin. Bank Rossiya was hit as well, which likely prompted Visa and MasterCard to stop providing it with services for payment transactions. The firm has about $10 billion in assets, "numerous relationships" with banks in the US and Europe, and was targeted because its owners are part of Putin's inner circle, the Treasury said.The bank controls OAO Sogaz Insurance Group, one of Russia's largest insurance companies, and holds a stake in National Media Group, which owns broadcasters and the newspaper Izvestia, according to the bank's website. Bank Rossiya also manages the pension fund of state gas company Gazprom, and, together with partners including billionaire Alexey Mordashov, it bought 50 percent of the wireless operator Tele2 last year. Putin said today that he doesn't have an account at Bank Rossiya but planned to open one next week. Russian Deputy Finance Minister Alexei Mosieev said that the measures against Bank Rossiya posed no threat to Russia's banking system.

Of note, Putin today said Russia should refrain from further retaliation against the US in response to sanctions targeting members of his inner circle and other high-ranking government officials following the annexation of Crimea. "I think we need to refrain from retaliatory steps," Putin said.

The escalating sanctions prompted Standard & Poor’s, the rating agency, to revise its outlook for Russian debt down to negative from stable, citing "rising geopolitical and economic risks."

Comments: The key to sanctions is whether or not the EU ramps them up to the bite that U.S. sanctions are now having. Europe has far more to lose on tit-for-tat sanctions than the United States. The situation continues to escalate, and tensions would dramatically rise should Russian forces enter the Ukraine's mainland, or some other former Soviet-controlled state. Nothing can be ruled out at this time.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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