Thursday, August 7, 2014

7/8/2014: Russian response to new sanctions


Sanctions tit-for-tat between Russia and the West keeps going on.

Yesterday, Canada announced new economic and travel sanctions against Russian banks and high-ranking officials to match the latest round of of the EU and the US measures (see: http://trueeconomics.blogspot.it/2014/08/282013-sanctions-v-russia-some-fallout.html).

Canadian Prime Minister Stephen Harper said that: "Export restrictions announced by the European Union with respect to military and military dual-use goods destined to Russia are already in place in Canada. We are also committed to imposing the necessary regulations to enact export restrictions on technologies used in Russia's oil exploration and extraction sector. Those will be implemented in parallel with our allies."

The Russian entities hit by the sanctions are:

  • Bank of Moscow
  • Dobrolet Airlines
  • Russian Agricultural Bank 
  • Russian National Commercial Bank
  • United Shipbuilding Corporation
  • VTB Bank OAO

Canada's list of sanctioned individuals excludes three business owners who are sanctioned by the US and EU, but have extensive business interests in Canada. The full list of entities and individuals impacted by Canadian sanctions is available here: http://www.ctvnews.ca/politics/canada-to-deploy-military-supplies-equipment-to-ukraine-ctv-news-1.1948163

What Russia is doing to mitigate the adverse effects of sanctions?

1) Imports substitution (long-term process) - ramping up production of components usually imported by its own defence industries to replace supplies lost due to sanctions and Ukraine trade disruption. For example:

  • Sukhoi jets and other aircraft components imported from Ukraine; 
  • Caterpillar & JCB sales in Russia have been falling while those of their major competitors, such as Russian Kamaz and Belorussian Belaz have been rising. This trend continues since 2008-2009. Russian manufacturers share of the domestic market rose more than 30% since 2009, but this is now likely to accelerate, rapidly; and 
  • Switching to Russian-manufactured foreign equipment, e.g. Komatsu plant in Yaroslavl
2) Imports switching by substituting new longer term contracts for supply of goods and services in favour countries that are not imposing sanctions. Three examples:

  • In aircraft leasing (Dobrolet and Aeroflot) contracts are being moved from Ireland to Hong Kong; 
  • Turkey will be the alternative source of supply of fresh fruit and vegetables to Russia, as announced yesterday; 
  • Russia has negotiated a major beef deal with Brazil and there are advanced talks on same with Argentina aiming to largely replace European shipments. Russia also announced it will switch to purchasing New Zealand dairy products, especially cheese.
  • So Russia is not going for an autarchy in food markets, but rather for switching away from EU and US suppliers.

3) Longer-term exits from the markets:

  • In June, Gazprombank raised EUR1 billion at 4% pa in the foreign markets via a bond sale on the Irish Stock Exchange. Gazprombank has one of the largest exposures to international funding markets of all other Russian financial institutions - it has 78 outstanding eurobond issues denominated in a number of currencies. All these will be migrating on maturity to different geographies as long as sanctions continue. It is also highly likely that even once sanctions are listed, Russian banks and corporates are likely to hold back their debt issuance in Western markets.
  • Rosneft has a finance arm in Dublin : Rosneft International Finance Ltd. which placed on December 6, 2012 two bond issues totalling $3bn, the oil major said in a statement. The first $1bn issue carries a 3.15% coupon rate and is scheduled to mature on March 6, 2017. The second $2bn issue carries a 4.20% coupon rate and is scheduled to mature on March 6, 2022. The bonds were listed and admitted to trading on the Irish Stock Exchange on December 7, 2012.
  • Irish law firms advise a range of Russian companies, including on Russian LPN, bond issues and ECP programmes: AHML, Federal Grid, Gazprombank, VTB, VEB, Rosneft, Uralkali, Norilisk Nickel, EDC, Borets, Metallionvest, Brunswich Railways, RenCredit, Alfa Bank, ABH Financial, Domodedovo Airport, Russian Railways, Promsvyaz and Probusinessbank.(see: http://www.arthurcox.com/practice_area/capital-markets/debt-capital-markets/).
  • VTB, via its VTB Eurasia Limited (an Irish company) issued U.S.$2.25bn Perpetual Loan Participation Notes via an Irish branch.

Retaliatory sanctions

In retaliation against Western sanctions, Russian President Vladimir Putin on Wednesday signed a decree limiting the import of agricultural, raw and food products from countries that imposed sanctions against Russia. Moscow banned, for one year (mating duration of Western sanctions) imports of all meat, fish, dairy, fruit and vegetables from the US, EU, Canada, Australia and Norway.

Further sanctions are likely. These are expected to impact:

  • Possible bans on breeding stock sales, biotech agricultural inputs sales, as well as
  • Possible ban on drinks imports from the EU.

Irish agricultural sales to Russia (see here: http://trueeconomics.blogspot.it/2014/07/1772014-irish-bilateral-trade-in-goods.html) are

  • EUR202.2 million in 2013, roughly 52% of Canada's trade of CAD563 million (EUR385 million) agricultural trade with Russia.
  • Roughly 1/3 of these sales comes from coffee, tea, cocoa, and products thereof, and another 1/3 from meat & meat preparations
  • Beverages - on top of the above - ca EUR12.1 million in 2013 in officially recorded exports. This excludes sales by major international brands which are predominantly imported into Russia via European subsidiaries and distributors. One example is Jameson Whiskey is now leading brand in whiskey sales in Russia since 2012. In 2012/2013 Jameson sales in Russia grew by 23% by volume (http://pernod-ricard.com/files/fichiers/Commun/Documents/RA2012_13_VGB_MiseEnLigne_28102013.pdf)

Conservatively estimating the sales via subsidiaries and distributors, Irish exports to Russia run at around EUR800 million, with roughly 1/3 of these coming from Agriculture, Food and Drinks sectors.

Some estimated 42% plus of these sales come from sectors dominated by Irish indigenous companies with roughly 50% of these accounted for Irish SMEs. There are some really brilliant examples of smaller Irish firms entering Russian markets in recent years and obtaining long term contracts to provide specialist goods and services that are provided from Ireland with zero tax arbitrage component to value added. In other words, when it comes to our trade with Russia, we have much higher indigenous jobs creation and real economic activity generation per euro of exports to Russia than from our exports to other major trading partners.

Few aside facts:

  • Russia is the fifth largest (by volume) importer of food in the world (http://www.businessinsider.com/worlds-leading-food-importers-2014-8)
  • Russia imported USD43 billion worth of food in 2013
  • Russia is the biggest consumer of EU fruit and vegetables
  • Russia is the second biggest buyer of U.S. poultry 
  • Russia is one of the largest importer fish, meat and dairy in the world
  • Russia bought 28% of EU fruit exports and 21.5% of its vegetables exports in 2011
  • Russia purchased 8% of US chicken meat exports last year.

Chart via Business Insider:

Net conclusions: sanctions response by Moscow will cost Russian consumers through increased prices. That is beyond any doubt. But the sanctions will be supportive (in the medium term) of improved agricultural production and food sector development in Russia. This effect is similar to the one achieved in the devaluations of the ruble post-1998 crisis. Sanctions by Moscow can have a significant impact on smaller open economies of Europe, like Ireland, with this impact concentrated on smaller domestic indigenous producers. If sanctions are broadened to include drinks, there will be even more substantial declines in Irish exports. It is clear that there will be no winners from the tit-for-tat sanctions wars.
Post a Comment