The United States has announced another round of sanctions against Russia. As usual, the media are commenting extensively on the topic, and as usual, an ordinary reader can make very little sense of those commentaries.
Once again, I asked Nikita Kulachenkov from the ACF investigations department to write a short sanctions explainer for those who want to understand the issue. You can read the first part of his explainer here.
So, here is what changed in the sanctions regime as of July 17, 2014:
The new U.S. sanctions have three and a half sections.
The addition of new individuals to the “Specially Designated Nationals and Blocked Persons List” (SDN). It now includes Borodai, Neverov, and several others. What this means for them is explained in our April post. Neverov’s mother-in-law did not end up under sanctions.
The addition of new legal entities and “organizations” to the “Specially Designated Nationals and Blocked Persons List” (SDN). The list now includes the DPR and LPR (the self-proclaimed Donetsk and Luhansk “people’s republics”), as well as defense-sector companies, including the Kalashnikov Concern. Any transactions with these entities are prohibited, and their assets are subject to blocking, as explained in our April post. Sadly, this means an American farmer will no longer be able to buy a new AK model made in Russia. He will, however, still be able to sell one he bought earlier.
The introduction of a new type of sanctions: “sectoral” sanctions. In other words, a ban on certain types of transactions with specific legal entities. There are two subsections here:
A ban on future transactions involving long-term loans (90 days or more) and on the issuance of new shares. In effect, this is a ban on raising any capital from the United States and a sharp increase in the cost of borrowing in Europe. VEB and Gazprombank have been placed on this list, and both have bonds issued abroad. Most likely, there will be no new placements, and borrowing will have to come from the state budget.
A ban on future transactions involving long-term loans (90 days or more). Novatek and Rosneft have been placed on this list. That means Rosneft will not be able to raise capital through loans and bonds, but it will still be able to do so through the issuance of new shares—or, in effect, through a reduction in state control over the company. There is a certain irony in that.
A few more amusing facts.
Rosneft borrowed money from BP to buy TNK-BP, which means that if things go badly, it will not be able to restructure that debt—and things will get even worse.
Transactions in derivatives based on the bonds and shares of companies on the list are not prohibited. So if someone wants to speculate on new shares or bonds issued on exchanges outside the United States, that is still allowed. This is a softening measure that will not help Rosneft and the others very much, but it does take into account the interests of American stock market participants.
In effect, the United States is gradually closing off Russia’s access to international capital markets. In other words, we are being politely denied the chance to enjoy the benefits and comforts of modern civilization. North Korea has nowhere to borrow money at all; we are heading in the same direction.
Let me add a few points of my own:
a) In my view, previously it was not the sanctions themselves that hurt the Russian economy so much as the very fact that they were imposed. This time, however, the actual sanctions measures look quite painful. Nothing catastrophic, of course, but this will cost at least 1% of GDP, and here I agree with Morgan Stanley’s estimate cited at the end of the article. One percent of GDP is a great deal. The everyday logic of “if you take one kopeck from a ruble, it is still a ruble” does not apply here.
b) As usual, when sanctions are discussed, various Kremlin “analysts” will crawl out and say: so what if the Americans are closing the capital markets to us, we’ll just borrow from the Chinese. Nothing of the sort is going to happen. With the Chinese, you play by their rules from start to finish. Russia may be able to borrow something from them, of course, but they will charge a ruinous price. On that subject, I recommend Mikhail Krutikhin’s article "U.S. Sanctions Are Pushing Russia into Debt Bondage to China"