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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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Friday, Nov. 28


Join table-top game aficionados at the British Book Center’s Board Game Evening. Held every Friday at 5 p.m., aficionados and amateurs alike can come take part in a variety of different games that test one’s intellect and cunning.



Saturday, Nov. 29


Cats, dogs, birds, rodents and reptiles are just some of the things that will walk and crawl at Lenexpo convention center this weekend as part of Zooshow, a two-day exhibition featuring not only man’s best friends but a four-legged fashion show, as well as a food fair that will help pet owners find out more about which kibbles are best for their hungry pets.



Sunday, Nov. 30


Remember the 75th anniversary of the beginning of the Russo-Finnish war in 1939 during today’s reenactment titled “Winter War: How it Was.” More than 200 people will take part in recreating the opening salvoes of the battle for the north in Kamenka, a small village situated between Vyborg and St. Petersburg, using authentic equipment and vintage vehicles from the era. The faux battle begins at 2 p.m.



Monday, Dec. 1


Serbia filmmaker Emir Kusturica is the featured guest this evening at the Lensovet Palace of Culture the Petrograd Side. Fans of the director will get the chance to watch his movie “Black Cat, White Cat,” as well as ask questions about his award-winning filmography. Tickets for the event, which starts at 7 p.m., start at 2,000 rubles ($42.50).



Tuesday, Dec. 2


Today is the final day of “Takoy Festival,” a three-week program of plays based on the works of Dostoevsky, Remarque and other famed European writers, whose work is transcribed for theatrical performances. Tonight’s festival finale is “Fathers and Sons,” a two-act drama staged by the Novosibirsk Academic Drama Theater based on Turgenev’s classic about familial relations.



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