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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. 30


Dental-Expo St. Petersburg 2014 concludes today at Lenexpo. Welcoming specialists from throughout the federation, the forum is an opportunity for dentists to share tricks of the trade and peruse the most recent innovations in technology and equipment, with over 100 companies hocking their wares at the event.



Friday, Oct. 31


Put your grammar and logical thinking to the test in a fun and friendly environment during the British Book Center’s Board Game Evening starting at 5 p.m. today. The event is free and all are welcome to attend.



Saturday, Nov. 1


The men and women who dedicate their lives to fitness get their chance to compete for the title of best body in Russia at today’s Grand Prix Fitness House PRO, the nation’s premier bodybuilding competition. Not only will men and women be competing for thousands of dollars in prizes and a trip to represent their nation at Mr. Olympia but sporting goods and nutritional supplements will also be available for sale. Learn more about the culture of the Indian subcontinent during Diwali, the annual festival of lights that will be celebrated in St. Petersburg this weekend at the Culture Palace on Tambovskaya Ul. For 100 rubles ($2.40), festival-goers listen to Indian music, try on traditional Indian outfits and sample dishes highlighting the culinary diversity of the billion-plus people in the South Asian superpower.



Sunday, Nov. 2


Check out the latest video and interactive games at the Gaming Festival at the Mayakovsky Library ending today. Meet with the developers of the popular and learn more about their work, or learn how to play one of their creations with the opportunity to ask the creators themselves about the exact rules.



Monday, Nov. 3


Non-athletes can get feed their need for competition without breaking a sweat at the Rock-Paper-Scissors tournament this evening at the Cube Bar at Lomonosova 1. Referees will judge the validity of each matchup award points to winners while the city’s elite fight for the chance to be called the best of the best. Those hoping to play must arrange a team beforehand and pay 200 rubles ($4.80) to enter.



Tuesday, Nov. 4


Attend the premiere of Canadian director Xavier Dolan’s latest film “Mommy” at the Avrora theater this evening. The fifth picture from the 25-year-old, it is the story of an unruly teenager but the most alluring (or unappealing) aspect is the way the film was shot: in a 1:1 format that is more reminiscent of Instagram videos than cinematic art. Tickets cost 400 rubles ($9.60) and snacks and drinks will be available.



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