U.S. Business Warns on `Scorched Earth' Russia Sanctions
(Bloomberg) -- Proposals now under consideration in Congress to expand U.S. sanctions on Russia’s big state banks could cause major turmoil for global energy supplies, an American business group warns.
“It will be a huge disruption to the global energy trading system -- like Rusal, but multiple times worse,” if new limits hit all the major Russian state lenders at once, Alexis Rodzianko, president of the American Chamber of Commerce in Russia, said in an interview in Moscow. The April decision to sanction aluminum giant United Co. Rusal continues to roil global markets for the metal.
Hitting state banks, which dominate the Russian financial sector and work closely with energy giants in the world’s largest oil-and-gas exporter, would be “a scorched-earth approach to diplomacy,” according to Rodzianko.
Congress could take up bills envisioning new sanctions in the coming weeks. Passage isn’t expected until after the Nov. 6 midterm elections, but support for increasing pressure on Russia is strong in both parties. The main bills under consideration include broad limits on transactions with some or all of Russia’s big state-owned banks, including giants like Sberbank and VTB Bank.
“If that’s the case, no major financial institution outside Russia will be dealing with such a bank,” said Alan Kartashkin, a partner at law firm Debevoise & Plimpton in Moscow.
“It’s highly unlikely to be all state banks,” given the potentially broad impact of such a move, Rodzianko said. “It may be a less significant bank that is chosen as an example.” The bills include Gazprombank, Rosselkhozbank, Vnesheconombank and Promsvyazbank as potential targets, as well.
Rodzianko said the U.S. seems to have realized the Rusal sanctions were too sweeping and thus has granted delays to allow the company and its customers to adapt.
Russian state banks, which control 60 percent of the country’s financial industry, service the majority of transactions for energy exporters. That’s a trend that’s accelerated since Rosneft and Gazprom were first subjected to more limited sanctions in 2014.
“If there are sanctions that threaten foreign trade, either through outright bans or limits on payments, naturally that would be a huge risk to the energy market,” said Deputy Finance Minister Vladimir Kolychev. “The initial reaction would be massive and it’s hard to say how long it would take for things to calm down.”
Exporters could try to switch their business to non-sanctioned Russian banks or foreign financial institutions. “But this would create huge difficulties -- it would be a massive undertaking,” said Alexander Danilov, an analyst at Fitch Ratings Ltd.
In addition to targeting state banks, the two main bills in the Senate -- S.336, dubbed by one if its authors as the “bill from Hell,” and S.2313 -- also envision restrictions on purchases of new government debt.
“Going after Russian sovereign debt is in the category of moves that are tough enough to hurt but not so tough they blow up in your face,” said Dan Fried, a former State Department official in charge of sanctions policy.
As currently drafted, the “bill from Hell” would take effect immediately on passage, while the latter would require a finding by U.S. intelligence of Russia meddling in elections to trigger the new restrictions. Either plan is likely to face significant amendments if it advances in Congress.
Even if the legislature doesn’t act immediately, the administration also could tighten sanctions under existing law. A decision could come as soon as next month on further penalties for Russia’s alleged role in nerve-agent poisoning in the U.K. this spring. German officials have said they expect the U.S. to impose restrictions on the Nord Stream 2 gas-pipeline project from Russia potentially before the end of the year, as well.
©2018 Bloomberg L.P.