September 9, 2016
By Anna Sayre, Legal Content Writer, SanctionsAlert.com
On July 1, 2016, the Western powers agreed to further extend sanctions imposed on Russia until 31 January 2017, much to the chagrin of certain international companies and exporters. For them, continued sanctions against Russia means further potential decreases in their sales revenue as well as unwelcome restrictions on their investment opportunities. While Western sanctions have certainly taken a toll on Russia’s economy in the past few years, Western companies have not escaped unscathed.
In our globalized world, it is nearly impossible to avoid the indirect adverse effects that result from imposing sanctions, particularly when those sanctions are imposed upon a country with strong international business ties. Through weakening the Russian economy, the EU and the US risks lowering the demand for Western exports, and thus weakening their own economies as a result. Russia’s counter-ban on certain Western imports also threatens to further weaken the countries it targets.
A summary of Western sanctions against Russia
Sanctions against Russia, in response to Russia’s annexation of Eastern Ukraine (i.e. Crimea), were first imposed on March 17, 2014. This first wave of sanctions was fairly soft and included: asset-freezes, travel bans against some Russian officials, as well as prohibitions on conducting business with any organization or company involved with the invasion of Crimea.
TIMELINE OF SANCTIONS AGAINST RUSSIA
March 17, 2014: Crimea Annexed: first wave of Western sanctions against Russia.
July 31st, 2014: Flight MH17 shot down: second wave of Western sanctions against Russia.
August 7th, 2014: first Russian counter-sanctions targeting food imports.
2015-2016: extensions of Western sanctions as well as Russian counter-bans.
July 1st, 2016: most recent extension of Western sanctions against Russia until January 2017.
On July 31, 2014, following the crash of Malaysian Airlines flight MH17 allegedly shot down by mistake over Ukraine by pro-Russian insurgents,the second round economic sanctions against Russia were implemented.These, arguably more severe, economic sanctions restricted lending to Russia’s state banks, imposed a trade embargo on arms, a ban on the exportation of oil, technology and services, as well as dual-use goods that have a potential military application.
In defiance to these harsher restrictions, Russian leader Vladimir Putin responded by imposing counter measures of his own against the West in early August 2014. This included a near total ban on food imports from the EU, US and other countries, including dairy, fruit, vegetables, chicken, beef, and fish.This, in turn, sparked a third round of sanctions, this time by countries such as Norway and even commonly-neutral Switzerland, imposing a myriad of bans and blacklisting of Russian individuals and companies.Putin has since extended his ban on food products sanctions with only the following food products being exempt to the embargo: baby food, selected animal products and live animals, fruit juices or canned fruit, milk and milk products, salmon fry, seed potatoes, onion sets, hybrid sweet corn, and dietary supplements.
Since that time, more and more countries have imposed sanctions against Russia, and countries with sanctions already imposed against the Kremlin,have extended their bans.
Effect on the Russian economy
While there is little doubt that the Western sanctions against Russia have had some effect on the Russian economy, it is difficult to estimate precisely how big that impact has been. For the first time in five years, Russia’s economy has shrunk by 0.5%, its currency has plummeted, and interest rates have skyrocketed. The restricted opportunities for attracting foreign capital, including loan refinancing, has also been a painful consequence of the sanctions against Russia. Many adverse effectsto the investment strategies of Russian entities have stemmed from the limited possibilities of obtaining capital from sources outside the system of Western financial institutions.
Though some experts argue that Russia’s descending economy can be mostly linked to the unrelated issues of sliding oil prices, it would be difficult to argue that Western sanctions have played no part at all in its dwindling economy.Russian officials, including the Minister of Economy, Alexey Ulyukaev, and Minister of Finance, Anton Siluanov, have estimated the cost of financial sanctions on Russia to be anywhere between $40-90 billion per year (about 1% of its GDP in 2016). Though this is not as much of an impact as the recent prices of oil, which is estimated at around 4% of the Russian GDP in 2016, sanctions against Russia nevertheless have undeniably had a substantial negative economic impact. Some experts predict an even stronger negative impact on Russia’s economy in the future due to the continued inability to attract capital from foreign sources, especially in relation to energy projects usually used to bolster the Russian infrastructure. Some believe that this coupled with further Western sanctions may putcrushingstrain on the already vulnerable Russian budget.
Effect of Russian sanctions on the West
Though Western sanctions have had a desired impact on the Russian economy to some degree, the balance of harm to Western companies cannot be ignored. Most Western losses are, arguably, caused by the retaliatory measures Russia has taken against the West. It is estimated that Russia’s counter-ban on food imports cost the US in excess of $9 billion per year.This, coupled with the effect of Western sanctions inadvertently causing low demand for Western exports by Russia has been felt by a number of big name brands.
A number of US companies have felt the effects of the crackdown on Russia by the West, most namely, food, car and oil companies.Ford Motor and Volkswagen Russian sales dropped 40% and 20% respectively in 2015. The Danish beer company, Carlsberg, saw its shares plummet over 20% in 2015 because of its ties as Russia’s number one brewer, and numerous energy and oil companies, such as Exxon and Mobil, have also felt the effects of decreasing sales because of the forced cancellation of Russian energy projects.
The EU has suffered similar economic losses as a result of its sanctions against Russia, though the overall impact on the EU economy has been rather limited. This is mostly because some countries economically rely on Russia, and vice versa. Despite Russia being EU’s third largest trading partner, representing 8.4% of total trade, the EU is in fact Russia’s number one trading partner, representing as much as 48% of total Russian foreign trade, and its most important foreign investor (i.e. up to 75% of foreign direct investment comes from the EU). Certain sectors and countries, most notably Germany, have been more significantly affected by sanctions against Russia than others.
Estimates of the impact to the EU economy vary, however, most indicate an overall resilience of the European economy to any adverse effects of decreased trade with Russia. Most importantly, sanctions against Russia are not thought to be a systematic threat to the EU’s financial sector. The most visible direct effect is the substantial fall in EU agricultural and food exports to Russia following Russia’s ban on food imports. The losses are, however, mitigated to a large extent by redirecting exports to alternative markets.
In light of potentially damaging effects on business, it is essential to maintain a watchful eye. Often times, however, this is not as easy as it would seem. Maria Miltiadou, a sanctions consultant in Cyprus, says that “although US and EU/UK sanctions are very much alike, they differ somewhat in the scope of targeted entities and imposed actions. Companies must consider their jurisdiction for the specific transaction whether it is for restricted exports, re-exports and services they are providing to clients.”
Continued struggle for foreseeable future
Western countries may rethink their stance on Russian sanctions. Many continue to struggle in the wake of the global financial crisis, and European governments are reportedly considering allying with Russia in Syria. However, Russia’s refusal to back down from the crisis in Ukraine despite hard-line sanctions imposed by the West tends to suggest that the effects of sanctions could be felt by Western companies for the foreseeable future.
In the meantime, companies doing business with Russia should keep a vigilant eye on these developments and brace themselves for a continued struggle until at least 2017.