By Moscow Trader, a Russian commodity trader, financial pundit, avid cricket fan, and jazz aficionado. This article is a Wolf Street exclusive:
The effects of the first round of US sanctions enacted in the aftermath of Crimean referendum have been somewhat, let’s say, surprising for Western mainstream media. Besides the obvious fact that the sanctions haven’t had a visible impact on Russian foreign policy, they marked the local bottom of the Russian stock market, which has since outperformed the US stock market.
This chart, comparing the Market Vector Russia ETF (RSX) and the SPDR S&P 500 ETF (SPY), is an illustration of the effectiveness of the Obama Administration’s Russian policy. Not even the plunge of the RSX following the tragedy of Malaysia Airlines flight 17 pushed the RSX down to the level of the SPY:
Let’s take a look at the companies targeted by the new round of sanctions and see whether their existence is threatened by the Washington’s decision to cut them off from the US debt markets.
Obviously, the impact of these measures on companies in the Russian defense sector is nil. They don’t care one way or the other; neither their markets nor their financing sources are in US. The only people who should be upset about the sanctions on those companies are the US citizens who have ordered Kalashnikov rifles and will have to settle for an inferior product.
This leaves us with two banks, VEB and Gazprombank, and two energy companies, Rosneft and Novatek.
Gazprombank is the “pocket bank” of Gazprom, the Russian energy giant. Being completely locked out of US-based or even dollar-denominated financing will not affect the bank’s business model. According to the most recent accounting data, cited by RBK, the amount of Gazprombank’s outstanding foreign debts is equivalent to roughly $16 billion, and that’s around 16% of the bank’s debts. In 2014, only $2 billion come due. Peanuts compared to the bank’s deposit base of $57 billion.
VEB, the Russian state-owned development bank, is in a similar situation. It has some outstanding eurobonds worth $10.2 billion but, according to the same report cited by RBK, the closest significant payments ($11.4 million) are due in 2016. So, at least for the next two years, there is no reason to believe that VEB operations will be significantly affected.
Fitch, in a recent research note dedicated to the two banks, cited a similar logic as a reason for maintaining the current ratings. Moreover, the Central Bank of Russia stepped in to support Gazprombank and VEB. “If needed, adequate measures will be taken to ensure that the interests of the clients, depositors and creditors are protected,” it explained in a press release. The CBR can provide ample dollar liquidity; one of the obvious sources for financing the affected banks is Russia’s $111.4 billion portfolio of US Treasuries.
As for the energy companies, the situation is even simpler. Neither of the two sanctioned entities needs external financing in order to operate. Both companies have positive cash flow and have no need to refinance their debts. Novatek, the biggest private gas producer in Russia, has only one project that needs external financing: Yamal LNG but given that the project is backed by Total and CNPC, most market observers believe that either of those partners will be able to find financing at affordable rates, even if Novatek is completely shut out from debt markets.
At first glance, the situation for Rosneft is more complicated. Despite having positive cash flow, the company has to service a hefty debt load, a legacy of the acquisition of TNK-BP. However, it seems that Rosneft’s CEO Igor Sechin foresaw this development, and his strategy of focusing on China and obtaining massive prepayments from Chinese customers is the perfect financing option for a sanctioned entity. Raiffeisenbank’s energy specialist in Moscow, Andrey Polishchuk, summed it up this way: “According to my estimates, in 2014-2018, Rosneft will get $63 billion in advance payments. In such a case, the company will not have any problems to pay its debts and dividends until 2019.”
All in all, the sanctions are toothless, and the White House must have known that they are. So why did it refrain from using stronger options? One possibility is that Washington doesn’t really want to enter into a full-fledged economic war with Russia and is surely unwilling to do it alone. It is obvious that the European Union doesn’t want to cut its energy, financial, and industrial ties with Russia. But without European support, the only thing achievable by the White House would be a retaliatory economic strike from Moscow.
However, by using these watered-down sanctions, the Obama Administration killed two birds with one stone: the headlines about the sanctions and the list of targeted entities looked really scary for the uninitiated; at the same time, nothing important happened. Trying to look tough without taking tough actions is an art in itself, and most American politicians are very adept at it. By Moscow Trader, exclusive for Wolf Street.
Don’t let a good crisis go to waste – that appears to be Putin’s newest slogan. Read… Putin’s Approval in Russia Soars to Record, America’s Plunges to Near Zero