In April, the US imposed a ban on business transactions within its territory on 17 Russian companies. However, it is believed that the sanctions only got serious in July, as their effect was to cut off Russia’s state-owned companies from Western debt markets.
The US extended its transactions ban to two of Russia’s major energy companies, Rosneft and Novatek, and two banks, Gazprombank and Vneshekonombank. The EU introduced sanctions against certain sectors of Russia’s economy, including the financial sector. In September 2014, the United States imposed sanctions on Russia’s largest lender, Sberbank, a major arms maker, Rostec, and major oil giants like Lukoil, Rosneft and Gazprom Neft, seeking to ban cooperation with companies like Exxon Mobil and BP on energy technology and arctic exploration services.
Russia’s banking sector, which has been locked out of international capital markets since July, has become one of the most vulnerable components of the country’s economy. Sanctions directly affected more than 50 percent of the sector, which is dominated by state financial institutions. Russia's second-largest bank, VTB, is a case in point: it reported a 90 percent drop in its third-quarter profit. The corporate sector is probably a bigger area of concern, as a number of major companies have been put on the sanctions list as well, says Alexander Danilov, Senior Director at Fitch Ratings' Moscow office.
"Corporations are trying to borrow from local banks to service their external obligations, and for banks it’s like double pressure; on the one hand, they have to repay their own liabilities… but there’s an additional source of pressure from the corporations, as they’re trying to borrow, and that would put pressure on the banks’ liquidity."
With sanctions weighing on business sentiment, Russia’s economy has been losing loads of capital this year. Net private capital outflows from banks and companies reached $77.5 billion in the first nine months of 2014 compared with $45.7 billion in the same period a year ago, according to the Central Bank’s statistics. The country’s economy could start shrinking closer to yearend, potentially moving into its first recession since 2009 early next year, Deputy Economy Minister Alexei Vedev said.
“We now assume that sanctions will remain in place throughout the whole of 2015. This for us means closed capital markets for the majority of Russian companies and banks, as well as unfavorable conditions for investment, uncertainty and a lack of security.”
The sanctions against Russia were followed by counter-sanctions on imports of food and agricultural products, which were levied by Russia against the EU, the US, Canada, Australia and Norway for a year. Since the bulk of Russian imports come from the European Union, a number of EU countries reported huge losses after the Russian market was closed off from them. Some companies in particular have been cutting staff and reducing operations.
Finnish food company Valio is considered to be the hardest hit of all companies in Finland, as Russia has been its biggest market as well as a continuously growing export market; it generated almost 20% of the company’s net sales last year. Valio has officially stated that its Russian branch would most likely face a gradual run-down of operations.
Dr. Frank Schauff, CEO of the Association of European Businesses in Russia, gave his view on the sanctions issue in an exclusive commentary to Sputnik News.
Russia conducts about 50 percent of its foreign trade with the European Union… Alternately, when seen from the European perspective – Russia is number three. Those are certainly very important trading relations between the two partners and we would like not to have any economic sanctions; we would rather prefer to speak, sit at a table and find a solution to the given problem rather than to draw the business and economic relations between the EU and Russia into this development, which harms their rather successful history of 20-25 years of ever- growing economic exchange in terms of trade and investment.
Any sanctions invariably cut both ways – not only does Russia feel the effect, but a few European states do as well, like Lithuania; Russia was the largest and most profitable market for some of its products, like cheese and yogurt. According to the European Bank for Reconstruction and Development (EBRD), food exports to Russia accounted for 2.7 percent of Lithuania’s gross domestic product. Another example is Slovakia, which reported that the direct negative effects of the EU-Russia sanctions on its agricultural sector alone have cost it 6.2 million euros.
