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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

Wednesday, Oct. 22


English teachers can expect to receive a few useful pointers today from Evgeny Kalashnikov, the British Council regional teacher, during the EFL Seminar this afternoon hosted by the British Book Center. The topic of today’s seminar is “Grammar Practice.”


Young Petersburgers will get the chance to jumpstart their careers at “Professional Growth,” a job fair and forum featuring more than 40 major Russian and international companies vying for potential candidates for future positions. The forum not only is a chance to network but also to learn more about the modern business world and to understand what it takes to get the job you want.



Thursday, Oct. 23


AmCham’s Public Relations Committee meeting is scheduled to meet this morning at 9 a.m. in their office in the New St. Isaac Office Center.


Sportsmen get their chance to stock up on all kinds of gear at the Hunting and Fishing 2014 exhibition starting today at Lenexpo. Everything from rods and reels to boats, motorcycles and equipment for underwater hunting will be on sale so that any avid outdoorsman can always be prepared.



Friday, Oct. 24


SPIBA’s ongoing “Breakfast with the Director” series continues today, featuring Tomas Hajek, Managing Director of the Northwest Division at Danone Russia. Hajek will be discussing collaborations between businesses from different cultures. The meeting is at 9 a.m. at the Domina Prestige St. Petersburg hotel and all who wish to attend must confirm their participation by Oct. 23.


Get your gong on at “Sounds of the Universe,” a concert at the city planetarium this evening incorporating six different gongs to create relaxing songs that will transport you upwards into the stratosphere. Tickets are 700 rubles ($17).



Saturday, Oct. 25


AVA Expo, the eighth edition of the event revolving around all things pop culture, returns to Lenexpo this weekend. Geeks, nerds, dweebs and dorks will have their chance to talk science fiction and explore a variety of international pop culture. Tickets for the event can be purchased on their website at avaexpo.ru.



Sunday, Oct. 26


Zenit St. Petersburg returns home for the first time in nearly a month as they host Mordovia Saransk in a Russian Premier League game. Currently at the top of the league thanks to their undefeated start to the season, the northern club hopes to extend the gap between them and second-place CSKA Moscow and win the title for the first time in three years. Tickets are available at the stadium box office or on the club’s website.



Monday, Oct. 27


Today marks the end of the art exhibit “Neophobia” at the Erarta Museum. Artists Alexey Semichov and Andrei Kuzmin took a neo-modernist approach to represent the array of fears that are ever-present throughout our lives. Tickets are 200 rubles ($4.90).



Tuesday, Oct. 28


The Domina Prestige St. Petersburg hotel plays host to SPIBA’s Marketing and Communications Committee’s round table discussion on “Government Relations Practices in Russia” this morning. The discussion starts at 9:30 a.m. and participation must be confirmed by Oct. 24.



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