Pressed by sanctions

Sanctions against Russia were initially imposed on individuals and did not cause deep concern. However, their toughening and extension to certain sectors of economy can bring some problems, in particular, with implementation of offshore and related transport projects, as well as with shipbuilding.

The farther, the tougher

USA, EU and their allies gradually toughen their sanctions against Russia. Initially, they were targeted at individuals while now they are extended to the largest and systemically important enterprises of fuel & energy as well as financial sectors of national economy. On July 16, the U.S.A. extended the list with such companies as Rosneft, NOVATEK, Vnesheconombank and Gazprombank. These companies cannot raise funds from the American market for  more than 90 days. Similar sanctions have been imposed by Canada.

Then, on July 24, EU added to its sanctions list the enterprises nationalized by the Crimean Government. It includes Kerch ferry enterprise, Sevastopol commercial seaport and Kerch commercial seaport. The assets and accounts of the above enterprises in EU countries are to be frozen.

In late July, EU approved the new package of sanctions against Russia. They limit the access of Russia to significant energy-related equipment and technology (in the sphere of deep water oil exploration and production) and to their financing. Besides, an embargo on the import and export of arms dual use goods was agreed. Meanwhile, contracts signed before August 1, 2014 can be implemented.

The U.S.A. was not late to impose sanctions on a number of other enterprises like the United Shipbuilding Corporation in order to limit its access to the markets of capital and technologies.

As for sanctions against certain enterprises of transport industry, like the ports of Crimea, they are not likely to have any considerable negative impact on their operation. As the United Transport Directorate commented for IAA PortNews, EU sanctions do not interfere with the operation of Kerch ferry enterprise as they are not imposed on the Directorate itself, neither they prohibit the operation of European vessels (Greek ferries, for example). The sanctions are hardly able to do harm to Crimean ports the operation of which does not depend on the accounts outside Russia. More severe consequences of limited operation with Crimean ports are possible for vessels under control of western ship owners. In this context, the development of Crimean ports as cargo ports has limited prospects and Russia has to develop mainland port facilities.

The sanctions can also cause problems with the development of domestic shipbuilding and implementation of transport infrastructure projects.

Shipbuilding and sanctions

The sanctions against the United Shipbuilding Corporation mean certain difficulties for the corporation. As USC President Aleksei Rakhmanov said when interviewed by TV channel Russia 24, the sanctions are “not fatal” but USC mulls a transition to settlements in currencies other than USD with the use of yuan being “not a fantastic prospect”. According to Aleksei Rakhmanov, the corporation has no significant contracts with US companies though some contractors may have American shareholders which can cause certain problems.

USC statement says introduction of American sanctions against the corporation is an expected step and the company had taken this risk into consideration when planning its activities.

“The format in which the sanctions have been announced is more a nuisance rather than a significant obstacle for the United Shipbuilding Corporation in the operations and execution of the existing contracts. USC management is currently exploring all aspects of the USC situation prevailing in the imposition of sanctions, and then we will work out a solution to minimize the risks involved while executing our commitments to all our customers and partners,” USC press center comments.

Nevertheless, Aleksei Rakhmanov does not rule out certain problems in civil shipbuilding and says that Russia should achieve a 100% import substitution in naval shipbuilding. Besides, he expressed concern about the possible termination of cooperation with European partners in the field of marine equipment necessary for offshore projects. In this case, said Rakhmanov, Russian engineers and draftsmen will have “use again to the drawing board.”

Meanwhile, experts participating in the international conference SubSeaTECH 2014 held in Saint-Petersburg in early June emphasized that none of the parties can efficiently create specialized marine equipment for offshore arctic projects alone.

Moreover, Europe is still the center of competence in civil shipbuilding and Russia is to face significant challenges hindering technological development of shipbuilding if EU limits cooperation with Russia in the industry following the example of the USA. The more so as the latest sanctions of Europe already touch drilling rigs and marine facilities needed for deepwater production of oil and implementation of offshore projects.

Infrastructure and sanctions

As for the impact of the sanctions on large infrastructure projects it should be noted that the majority of them are financed by the federal budget and vertically integrated oil and gas companies, frequently attracting resources of both Russian (Vnesheconombank) and foreign financial institutions. So the sanctions can bring a material adverse effect. It is associated with availability of both technologies needed for exploration and production of oil and long-term financing.

Yet, the opinions of the analysts on possible impact of the sanctions on the largest infrastructure projects are different. As Dmitry Baranov, leading expert of Finam Management, commented IAA PortNews, the sanctions will not have any critical impact. “When speaking about possible prospects, implementation of infrastructure projects will continue even in case of toughened sanctions, - the expert believes. – First of all, because it is primarily important for Russia and the state will do its best to implement the projects. They can be given the status of the first priority and the authorities will support them in all respects. Secondly, those projects are mainly financed by Russian resources, both state and private ones, while the share of foreign finances is not significant, so the financing will continue. Moreover, the world of finances is a multipolar world and long-term financing can be raised from other regions. Thirdly, in case of a ban for supply of foreign equipment for such projects, the order can be partly placed with Russian enterprises and with other foreign companies, like those of Asia and Latin America.

Meanwhile, the analytical article of Greg Satell bupblished by Forbes presents less optimistic picture of the consequences. The author believes that Russia underestimates the dependence of international financial system of the USA. «Every financial institution needs a correspondent banking relationship with a US entity in order to do business,” Greg Satell says. He notes that the effects are already being felt. “Russian corporations can’t roll over their loans and have had to cancel IPO’s.  The Russian government has had to call off all but two bond auctions since the beginning of the crisis.  This adds to capital flight, puts pressure on the Ruble and creates inflation.  At the same time, it limits investment in the country and lowers income.” the author says. According to him, the sanctions can significantly harm the economy of Russia through problems with financing of budget expenses and large investment projects of Russian corporations.

The impact of the sanctions is aggravated by their unpredictability. Who knows what measures will be undertaken by western countries next time and which companies of Russia are to suffer. For example, EDF Trading (Electricite de France) has recently refused to accept vessels with Russian coal form Zarechnaya (Kemerovo Region) in the context of sanctions.

Vitaly Chernov