The real way to hit Russia

[abomvubuso]

It looked as if the markets had already grown accustomed to those anti-Russia sanctions and they had started ignoring the whole exercise. Just because the punitive measures may've lost their sting somewhat, or could it be that the Russian economy has somehow taught itself to live with them for the last few years since the Crimean annexation? Well, come April 6, all this sense of untouchableness evaporated - after the umpteenth batch of sanctions, that is. This time the effect was as swift as it was painful:

The new US sanctions were directed at 7 Russian oligarchs and their companies, plus 17 government officials, part of Putin's close circle. The shockwaves however radiated far and wide, since some of the punished companies have a global business and enjoy a significant presence at the global capital and stocks markets. This time the key difference was that the measures included a ban for US citizens to do business with the companies and persons in the blacklist, plus a warning for non-US citizens that they'd be punished if they have "significant transactions" with that list. And that's uncharted territory. In the past, the US ministry of finance was very cautious about two things: first, not to hurt US investors; and second, not to hit the stocks markets. This time the sanctions affected both.

The most eloquent example is one Oleg Deripaska. In just a two days, his largest public companies En+ (listed at the London stocks exchange) and Rusal (listed in Hong Kong) lost over half of their value, namely about $ 6bn. It's now all about a simple qestion: will you be doing business with Deripaska, or with the US from now on. You're either with us or against us, you know. That's a pretty blocking action indeed. It sends him a message: you're finished, lad. You can forget about doing business in dollars.

The domino effect from the punitive measures, in combination with Trump's threats to Moscow to "prepare for our new smart missiles", resulted in a frantic sell-off of Russian assets. So the Ruble experienced its worst week since 1999, and the Russian stocks went glowing in red. Now the bigger question is, what's the chance that these events would crush the fragile recovery of the Russian economy, which is just coming out of a two-year recession. And the answer depends on how well the panic will be overcome. The first signs have been good for Russia, but let's not hurry that much just yet.

Just half a year ago, Oleg Deripaska, considered Putin's favourite oligarch, was sitting at the top of the world. He had just done a remakable breakthrough: his hydro-energy and aluminium company En+ got listed at the London stocks, the first Russian company to ever be allowed access to that market after the 2014 sanctions.

Now with a single stroke, Deripaska was turned back into an international financial pariah, and two of the pearls of his biz empire, Rusal and En+ are threatened with technical bankruptcy. The rumble from the collapse echoed as far as Swiss-based Glencore, the biggest company for raw materials in the world. To avert the contagion, its CEO Ivan Glazenberg was forced to resign from Rusal's board of directors. Another blow for Deripaska was delivered by the LME (a London precious metal exchange) which decided to stop trading Rusal's aluminium, and that put additional brakes to Deripaska's placement capabilities.

Rusal's tragedy, world's number one aluminium producer with 9% of the global produce, has the potential to shuffle the global aluminium market and cause a rearrangement of the supply flows. What's more, it's coming just as Trump is imposing those aluminium tariffs.

Although the remaining six oligarchs from the blacklist didn't suffer so loudly as Deripaska (who's been subject to investigation from Muller due to his links to former Trump campaign manager Paul Manafort), there are also some interesting names there. Like financier Viktor Vekselberg, who was among the guests of honour at Trump's inauguration ceremony. Wink-wink.

The Trump administration says the sanctions are related to Russia's actions in Crimea, Syria and Ukraine, as well as its meddling in Western countries, including through cyber-warfare. While previous US sanctions directly related each punitive measure with a particular reason, this time the selection of justifications seems a bit random and arbitrary. And this fuels concerns among the Russian business circles that anyone who's in frequent interaction with Kremlin and occupies a renowned position in the country's economy is now a potential target.

Now, none of the top 100 richest Russians could be sure that they wouldn't be next. Not just a couple of Russian companies but the whole Russian market is threatened with drowning. This is starting to look like a sweeping assault on the entire Russian elite. Whether the hopes that this pressure would make some members of this elite to turn against Putin are grounded in reality, is quite another question, of course. But the attempt is already there.

Putin's government has already promised help for the affected companies, because they provide jobs to hundreds of thousands of Russian citizens - they've been lending support for such companies since 2014, after all. Except, the question is not if Putin wants to help them - it's whether he can. For the last three years, his government has spend about 6.4 billion Rubles from the Reserve Fund and the National Prosperity Fund to support the waning economy. Now the NPF has only 3.7 bn Rub left in it, and if the sanctions prove to be prolonged and their scope expanded, this cushion could turn out insufficient. It won't be easy then to explain to the Russian people, sliding back into poverty, that they'll be having to pay more from their pockets to bail out huge businesses worth billions.

There's some good news for the slowly recovering Russian economy, though. Unlike four years ago, this time the sanctions are not coming at a moment when the oil prices are plummeting. That was the reason for Russia's most recent recession in the first place. Besides, the Russian banks and the corporate sector are in a better shape than four years ago, and they've unloaded the bulk of their debt into foreign currency, so there's not really a huge time bomb ticking.

Still, the US moves are putting Russian economy at a greater risk. One of the immediate consequences is that we can't expect the central bank to lower the interest rates for the upcoming half a year, or more. The expectation is that this year or the next, the Russian GDP would grow by almost 2%. But significant reform plus a lot of investment would be needed to achieve more than that in the long term. And the cold chill coming from these new sanctions could scare off or repel those foreign investors who've started looking more positively to the Russian market lately. As one CEO of a Western investment fund noted, when the first sanctions came, everyone thought they'd be temporary. Now people are starting to realise that they'll be here to stay for a while.

Comments

[halialkers]

Hitting Russia is trivially easy since what economic recovery it's made is based on being a petrostate. Putin's shown he doesn't care about what happens to Russia as long as it isn't putting he himself personally at risk. Will this break that pattern or will he just shrug and keep on doing what he's doing? The strange bit with Russia is it really lacks the financial and everything but firepower heft to do what it does as it does it, yet doesn't let this slow down or deter its dictator in the least.

With dictatorships, dictators can afford to ignore what more democratic leaders cannot.

[mikeyxw]

Yes, but dictators like Mr. Putin can't dictate alone, hence the Oligarchs. There is of course no guarantee of success, but hitting Mr. Putin in the oligarchs does seem like a promising way to cause some pain.