Sanctions Against Russia: The Aftermath

By Roksana Khort

In early March 2014 four major international players – the US, EU, Canada and Australia, concurrently introduced a first package of sanctions against Russia as a response to its policy in relation to Crimea and escalation of a military conflict in Eastern Ukraine. Even though Canadian and Australian sanctions were very similar to that of the United States and European Union, their effect passed unnoticed, whereas the implications of EU and US sanctions strongly affected Russian economy and therefore are way more interesting from economic perspective.

Along with diplomatic and restrictive, the US and EU adopted a package of economic measures against three sectors of Russian economy: oil industry, financial sector and military industry. As a response, Russia stroke back with symmetric restrictions on import of certain agricultural products from the US, the EU, Canada, Australia and Norway.

Western sanctions and Russian oil

The EU sanctions against Russian extractive industry outlawed “any sale, supply, transfer or export of technologies{…}for{…}deep water oil exploration and production, Arctic oil exploration and production, or shale oil projects in Russia”, unless authorized by a competent authority in a number of exceptional cases. At the same time, the US has approved measures against export of goods, services and technology for oil and gas exploration and production for Russian deepwater, Arctic offshore and shale projects. A number of Russian oil and gas companies were affected by these restrictions, including Lukoil, Surgutneftegaz, State-owned Transneft, Rosneft and Gazprom – leaders in Russian oil and gas industry.

Needless to deny that Western sanctions have adversely influenced activities of Russian companies so unluckily included into the “black list”. Estimated loss incurred to the industry sector from the EU and US measures is worth $20bn. However, despite financial crisis and Western sanctions, Russian energy sector demonstrated economic growth for 2014 – weaker ruble and adverse trade measures slightly boosted manufacturing sector of Russian economy by 2,1%, up from 0,5% for the previous year[1].

Any sanctions always have a twofold effect: they worked not only against Russian, but also against Western companies interested in oil and gas exploration in collaboration with their Russian counterparts. As a matter of fact, British Petroleum and Exxon will surely take a hit from economic sanctions. BP, for example, the biggest British oil and gas company which rests in a top five oil and gas supermajors, is a stake holder of Rosneft, having its 20% share in Rosneft’s trials and tribulations. At the same time, US-based Exxon also had high expectations from a number of oil exploration projects in Black Sea, Russian Arctic and Western Siberia. In its Annual Report for 2014, Exxon revealed that its loss amounted to $1bn as a result of the US sanctions against Russian energy sector. In sickness and in health, in good times and in bad, as some would say.

Investment climate

According to financial data from the Russian Central Bank, the income from investments in the pre-sanctions period, i.e. in the first quarter of 2014 equaled to $12,5bn, whereas for the same period of 2015 it had dropped down to $8,3bn, remaining on the same level as for the previous quarter. The decrease in investments was a natural reaction of Russian market to trade restrictions.

Taking into account the weakness of the ruble and increase in costs of external borrowing, now investing in Russian economy might be considered a risky business. And no wonder, Russian equity market is in intermittent fever – major industrial players and potential investors are perplexed by possible implications of Western sanction policy and reactions of unstable Russian market to every financial blow.

Nevertheless, according to Bloomberg, “risky” investments prove themselves very gainful. Surprisingly, low oil prices played in favor of Russian economic system, making its equity market one of the most attractive to foreign investors. Profit from investments in Russian economy in the first half of 2015 was the highest among BRIC countries. While China was struggling with the overestimation of equities, provoking panic at its stock market, Russian MICEX Index showed a significant growth this year rising up to 17%. Being a cut above China in terms of the stock market advancement, Russian economy is similar to a spring – it shows an impressive tendency to fast recovery.

Food and agriculture

Russian embargo on food and agriculture was enacted by the Decree of the President No. 560 as of August 6, 2014, and the Decree of the Government No. 778 as of August 7, 2014. Both Decrees outlawed specific types of products imported from the EU, the US, Canada, Australia and Norway. The list of restricted products included: meat and poultry, fish and seafood, dairy products, fruits and vegetables, ready-made meals, etc. The ban was imposed for a duration of one year with a possibility of extension for the same period, which was performed in early August 2015 when no consensus between Russia and the Western world was reached.

Russian market was definitely not ready for the embargo. Domestic resources were not enough to satisfy the demand in sanctioned products, belated response of the Government regarding import logistics resulted in severe price shocks and consumer-price inflation which grew up to 11,4% in contrast to 6,5% for the previous year[2]. By the end of 2014 the volume of imports showed a significant drop by 24%, in contrast to the previous year and amounted to $24,7bn[3]. A drop in consumer demand was due to a shift of the public behavior pattern from consumption to economy, which, paradoxically, slowed down the increase in prices. Being not so good for a Russian consumer, this phenomenon gave time to rearrange logistics and perform a full switch of food imports from black-listed economies to Latin American countries, Turkey, and Belarus.

One year after the enactment of embargo, it is clear that Russian economy has not only withstood the challenge, but quite benefited from it. According to the Federal Customs Service, sanctioned products are being gradually replaced by their national analogues. Statistics shows that due to the increase in domestic production, Russian market needs a lower import injection for some types of sanctioned products, and this need is steadily decreasing. For example, the volume of cheese import has decreased by 38,1%, meat – by 24%, butter – by 13,2%[4]. It seems that Governmental policy on stimulating national producers proved itself quite efficient – it reduced import costs by 7,7% leaving extra rubles in Russian budget.

Russian embargo gave economic advantage to countries unaffected by sanctions, and at the same time brought concern and financial loss to the EU. Taking into account that in 2014 Russia was the 5th largest food importer in the world, no wonder that its share in the consumption of European agricultural exports was considerable. Only in 2013 it brought €11bn to European economies which was around 10% of total EU agricultural exports. Most of the financial blow was taken by Germany, Belgium, and the Netherlands. Both Belgium and the Netherlands lost on sanctions more than €500mn. As regards Germany, Russian ban affected it rather indirectly. Losing only 3,3% of the total export value on Russian sanctions, Germany, however, might soon be dealing with significant price drops on outlawed products – what is produced in EU but not exported to Russia, would flood the European market and decrease consumer prices, to the benefit of the European consumer and to the detriment of the European farmer.

References: 

[1] Ministry of Economic Development of the Russian Federation, “On conclusions on Social-Economic Development of the Russian Federation in 2014”, February 2015, p.7

[2] Ministry of Economic Development of the Russian Federation, “On conclusions of Social-Economic Development of the Russian Federation in 2014”, February 2015, p.4

[3] Ministry of Economic Development of the Russian Federation, “On conclusions of Social-Economic Development of the Russian Federation in 2014”, February 2015, p.4

[4] “Export-import of important goods in January-December of 2014”, Russian Federal Customs Service as of February 9, 2015

2015-12-03T10:50:06+00:00

One Comment

  1. Sergei V. Kasyanov 19.10.2015 at 23:51

    Very professional! Good style, flawlwss English!

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