Russia Sets Out to Sanction Western Sanctions
(Bloomberg Opinion) -- Just as investment banks are cutting their growth forecasts for Russia because of a growing likelihood of new U.S. sanctions, Russian legislators are looking for a strong response. A proposal that could make it illegal to obey the penalties received preliminary approval from the the parliament’s lower chamber on Tuesday. It may not be Moscow’s final word, but it shows the Russian political elite is leaning toward deeper self-isolation.
The bill, sponsored by the speakers of both chambers of parliament and the leaders of all parliamentary factions, proposes a sentence of up to four years in prison for applying any foreign sanctions in a way that restricts the ability of Russian citizens or entities to perform “ordinary economic operations or deals.” The U.S. and its allies initially imposed sanctions on Russia in response to its aggression against Ukraine in 2014. At first, the penalties focused on travel bans and asset freezes, but they were gradually strengthened to restrict borrowing and access to U.S. technology for state-controlled companies and to make it impossible for some businesses deemed close to the Kremlin to trade with the U.S. More Russian companies could be hit in another round of sanctions.
Given the prominence of the new bill’s sponsors, it’s likely that it eventually will become law, but probably with some Kremlin-prompted amendments. The giant state-controlled banks that are the backbone of Russia’s financial system -- Sberbank and VTB -- are the obvious exceptions, as neither has branches in Crimea. Although both banks are subject to U.S. and European sanctions limiting their ability to borrow in Western markets, working in Crimea would expose them to asset seizures and full-blown pariah status.
“You can imagine the price of this matter for Sberbank, for the nation’s financial system and Russia’s competitiveness,” Herman Gref, Sberbank’s chief executive officer, said in 2017 of his decision to stay out of Crimea. “There is no scheme that would allow us to work there without being hit by the entire pool of sanctions.”
A four-year sentence for Gref isn’t what the legislators or President Vladimir Putin have in mind. Anatoly Aksakov, head of the parliamentary committee for financial markets, says the big state banks won’t be affected by the new law. This sets the stage either for amendments that will specify exceptions or, just as likely, for the time-honored Russian practice of selective application.
The law can, for example, be used against the executives of foreign companies that operate in Russia and who refuse to deal with sanctioned companies (including much of the Russian defense industry) or take on projects or clients in Crimea. Germany’s Siemens, whose gas turbines ended up in Crimea last year, responded by fighting in the courts, withdrawing from a Russian joint venture and stopping supplies of energy equipment to Russia. Its managers would be obvious targets for the new bill. Exxon Mobil, which has scrapped some Russian projects because of sanctions but retained a strong presence in the country, could also be affected.
Generally, the bill targets any multinationals whose activity in Russia is restricted by the sanctions. That’s a potential blow to investment even as the U.S. government is more willing to introduce restrictions that can really hurt Russian companies: Rusal, the aluminum giant is threatened with losing its U.S. business, which accounted for 14.4 percent of revenue last year.
“The impact of the sanctions could be viewed as similar to that of the demise of Yukos,” Goldman Sachs wrote in a report this week, recalling the Russian government’s takeover of the country’s biggest oil company in the 2000s. “The Yukos shock did lead to a significant slowdown in activity, and in investment activity in particular." Morgan Stanley predicted that the sanctions would “reduce private sector investment and increase the risk premium.” Both banks have cut their 2018 growth forecasts for Russia: Goldman Sachs to 2 percent from 3.3 percent and Morgan Stanley to 1.8 percent from 2.3 percent.
Russia’s economic output grew just 1.3 percent in the first quarter of 2018, compared with the year-earlier quarter. The Bloomberg consensus forecast is for gross capital formation -- investment minus asset disposals -- to fall to 3.2 percent this year from 7.5 percent in 2017. If the government cares most about the economy, this isn’t a great time to tell investors they could be prosecuted for applying Western sanctions. So Putin’s response to the anti-sanctions bill is a test of whether his priorities will shift toward the economy during his fourth term in power.
The signs are that the priorities will be the same as in the past six years, however. The new cabinet, which Prime Minister Dmitry Medvedev is in the process of forming, looks a lot like the old one. “System liberals” hoped former Finance Minister Alexei Kudrin would get a senior post in the government or on Putin’s staff. Instead, he has accepted an offer to head the Accounting Chamber, a body meant to ensure budget compliance and that is peripheral to economic policy making. On Tuesday, Putin attended the inauguration of a new bridge linking the Russian mainland to Crimea, continuing to demonstrate his commitment to the annexed peninsula’s integration into Russia.
The thinking that marks the beginning of Putin’s fourth term is in line with an article that Vladislav Surkov, one of the Kremlin’s top ideologues, published in a policy journal in April. Surkov argued that Russia is destined for some form of isolation:
Russia is an eastern-western half-breed country. With its double-headed statehood, its hybrid mentality, intercontinental territory and bipolar history, it is, as befits a half-breed, charismatic, talented, beautiful and lonely.
Seen in this light, legislation reinforcing the loneliness shouldn’t detract from Russia’s charisma. And if foreign investors still prefer to stay away rather than face prosecution or jeopardize their standing in Western markets, the legislation can still be used against Russians -- for example, against the anti-corruption activist Alexei Navalny, whose investigations are keenly watched by Western officials responsible for sanctions. The anti-sanctions bill threatens Russian citizens with up to three years in prison for “conscious actions that aid the imposition of restrictive measures by a foreign state, an alliance of foreign state or an international organization.”
So far, Putin 4.0 is looking a lot like more of the same.
©2018 Bloomberg L.P.