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EU Sanctions Are a Double-Edged Sword

Published: August 4, 2014 (Issue # 1822)




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The financial elements of the European Union's "third stage" sanctions are sure to have a serious effect on the Russian economy. By prohibiting EU citizens and firms from trading in the new debt or equity of state-owned Russian banks, the EU has effectively shut Russian government-sponsored enterprises out of European capital markets.

But while these sanctions will hopefully be enough to end Kremlin interference in Ukraine, the EU should be cautious in its use of financial leverage. Although the EU's role as the world's banker gives it a powerful diplomatic tool, using its power carelessly may drive non-Western countries to create alternative financing models.

In the short term, financial sanctions place Russia under a great deal of strain. According to estimates published in the Financial Times, state-owned banks like Gazprombank, Rosselkhozbank, Sberbank, Vneshekonombank, and VTB have roughly 25 billion euros ($33 billion) in foreign currency denominated debt to roll over in the coming year.

Much of that debt is in dollars or euros. Without access to capital markets in the United States and now Europe, these banks will have to look to either Russia's Central Bank or other foreign lenders for support. In turn, Russia will see a drop in demand for its currency and a draw-down on the Central Bank's foreign currency reserves. Rating actions are also likely. The cost of capital will rise in Russia as a result. Indeed, that is the EU's goal.

The policy will have a significant impact on Europe. London will start hurting almost immediately as large financial firms lose new business providing services to Russian banks. Amid the growing uncertainty over Russia's future, spooked European and U.S. investors are likely to offload their exposure to Russia, if they have not already done so.

Over time, however, it is the countries with the largest financial exposure to Russia that will take the biggest hit. In absolute terms, the focus is on France (Societe Generale), Italy (UniCredit) and Austria (Raiffeisen). Once relative size is taken into account, however, even smaller countries like Hungary (OTP) should be added to the list.

Before long, the interest-rate shock will spread to trade financing and begin to suppress investment and consumption. That means trade with Europe will fall off, and European export-led growth along with it. Here the impact will be felt not only on traditional net exporters like Germany but any country that borders Russia (and so benefits from that proximity) as well.

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ALL ABOUT TOWN

Thursday, Oct. 2


The celebration of the bicentennial of the birth of Mikhail Lermontov continues with todays free exhibition in the citys Lermontov Library at 19 Liteiny Prospekt. Titled Under the Rustling Wings, the temporary exhibition will feature the costumes and scenery used in the 1917 production of Lermontovs play The Masquerade, which he wrote in 1835 when he was only 21 years old.



Friday, Oct. 3


Learn more about how to manage and evaluate employee performance during SPIBAs Human Resources Committee meeting this morning on Employee Assessment: Global and Local Trends. Starting at 9:30 a.m., the discussion will touch on such topics as the partnership between HR and business, reliable assessment strategies and more, with Tatiana Andrianova, the head of the SHL Russia and CIS branch in St. Petersburg, as the featured guest. Confirm your participation by Oct. 2 by emailing office@spiba.ru or calling 325 9091.


AmChams Procurement Committee Meeting is at 9 a.m. this morning in their office in the New St. Isaac Office Center on Ulitsa Yakubovicha.



Saturday, Oct. 4


Wine and cheese lovers will get their chance to revel during Scandinavia Country Club and Spas Wine Market Weekend. Going on today and tomorrow, wining diners can listen to live music, take part in culinary classes and, of course, sample a variety of fine wines from around the world. The cost of admission is 400 rubles ($10.30) for adults and 200 rubles ($5.15) for children.



Sunday, Oct. 5


Look for the latest fall fashions at the Autumn Market today in Freedom Anticafe at 7 Kazanskaya Ulitsa. The minimarket plans to offer clothes more flattering than the puffy jackets that are a staple of the citys cold-weather fashion, while offering the same amount of protection from the biting winds blowing off of the Baltic.



Monday, Oct. 6


SKA St. Petersburg, the citys KHL affiliate, welcomes Slovakian club HC Slovan in a match-up tonight at the Ice Palace near the Prospekt Bolshevikov metro station. The puck drops at 7:30 p.m. and tickets can be purchased on the clubs website or in person at either the arenas box office or the clubs merchandise store on Nevsky Prospekt.



Tuesday, Oct. 7


Learn more about Russias energy industry at the St. Petersburg Energy Forum that begins today and runs through Oct. 10. Attracting industry experts and political and business representatives, the forum plans to welcome more than 350 plus companies and their representatives to discuss the future of Russias largest economic sector.



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