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Will Russia Sanctions Backfire?

Politics / Energy Resources Mar 23, 2014 - 07:25 PM GMT

By: Pravda


Russian "energy kings" Igor Sechin and Alexei Miller may be added to the list of persons whose European accounts will be frozen in light of the application of sanctions against Russia. In addition, the heads of the state companies fall under EU visa restrictions. What are the possible consequences of such pressure on the key players in the energy market for the EU?

On Monday, after the announcement of the results of the referendum in the Crimea according to which the majority of the republic's residents voted for joining the Russian Federation, the European Union announced the names of the Russians who may be "black listed."

Western European and American authorities are introducing sanctions not against ordinary citizens but high officials and businessmen whose foreign accounts will be frozen and travel restricted. The list is expected to include Defense Minister Sergei Shoigu, FSB Director Alexander Bortnikov, head of the presidential administration Sergei Ivanov, Deputy Prime Minister Dmitry Rogozin and Security Council Secretary Nikolai Patrushev. Heads of Russian state-owned "Rosneft" and "Gazprom" Igor Sechin and Alexei Miller may be in the same boat, which attracted a great deal of attention in the media today.

As emphasized by the representatives of the European Union, the Russian "energy kings" may become personas non grata in the EU and the U.S., but so far (!) they are talking about sanctions for individuals and not to the officials. The Russian state monopoly responded to the EU statement with disbelief. "Gazprom" joked that in light of such sanctions European airlines will be profiting because they will have to bring partners to Russia, and "Rosneft" stated that the EU will hurt itself. The Russian experts interviewed by Pravda.Ru expressed general uncertainty about the implementation of the threats by the West. Besides, Russia can always answer by reducing energy supply, which may lead to a lack of heat for domestic purposes during the cold season. European voters are very sensitive to the slightest loss in comfort.

"They say that the lists included the heads of state companies ... It so happened that the economy is mostly comprised of state-owned companies that operate in the foreign market, such as "Gazprom," "Rosfnet." "Transneft." Well, they can do it, but I do not think that this will provide them any additional incentives for partnership or certain concessions and compromises with respect to these partners in the future," shared his opinion Vice Rector of MGIMO Artem Malgin. "In fact, these methods are a very serious psychological element. Crises come and go. This crisis, by and large, is not ours, it is happening in the neighboring country. So far it is developing without a single fired shot. But these threats create certain prejudices and complexes that the Russian representatives of big business may still have after the completion of this crisis. They are unlikely to go away quickly, and respectively, the general climate of the relations will be formed."

Indeed, politics aside, we should not forget that the international business continues to interact, and at the moment there are unfinished transactions in the works, such as purchase by "Rosneft" of oil trading business Morgan Stanley registered in London and headquartered in New York City. Despite the statements of American publications such as The Wall Street Journal that the Committee on Foreign Investment in the U.S. Treasury could block the deal, so far these words are just empty threats. For example, the same publication reported last week that Washington has worked out a scheme to isolate Russia from the dollar, which has been unanimously recognized by experts as fantasy. There can be multitude of such threats in the media, and it is not a given that they will be implemented and not refuted the same day.

"Sanctions are generally not a simple question, there are numerous rumors, denials, many leaks," said Anton Soroko, an analyst of the Investment Holding Finam. "I am inclined to think that sanctions can be directional. Freezing the accounts of senior officials, CEOs, maybe visa restrictions for a small group of the Russian population. But at the same time I do not expect sanctions against Russian companies. It will be very negative for the EU because there are export and import articles that would be difficult to replace for the European countries."

According to Soroko, the EU has very little leverage over Russia because of strong dependence on energy prices. It is not surprising that the representatives of "Rosneft" and "Gazprom" joked about Europe shaking its fist.

"In the event of an escalation both sides, the EU and Russia, will be hurt. But the EU may suffer more because it is still very much tied to our gas, and in the short term, if there is any interruption of supply or rise in the price of gas, they cannot replace it very quickly," said in an interview with Pravda.Ru a leading specialist of the Institute for Energy and Finance Yuri Rykov. "But I think that Russia will not agree to such steps, because it will be a very serious disaster for the EU. I think that after certain political statements this issue should be resolved, of course, if we do not assume the worst case scenario, freezing the accounts and other things. No one needs escalation. The United States may be interested in this to some extent because it would destabilize the situation in Russia."

Last Friday, the EU officials said that visa and economic sanctions would be introduced against 130 Russian officials and large businessmen. The "blacklist" already exists, but when and in what form the sanctions will be implemented remains a mystery. Apparently, the EU officials are in no hurry to bring the threat to action, still expecting that Russia will change its position in relation to the Crimea.

Maria Snytkova

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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