I owe the Euros an apology. It turns out that they did implement most of the sanctions recommended in the “non-paper.” So it proved to be more than an orphan straw man.
That said, upon further consideration, there is less here than could have been hoped for. Indeed, these sanctions will impose little real damage on Russia.
There are three major pieces of the new European sanctions. First, Europeans (including foreign subsidiaries and branches of non-EU banks) are prohibited from buying new equity or debt with maturity of greater than 90 days from Russian banks with more than 50 percent state ownership. Second, there is a ban on the sale of oil technology and equipment. Third, there is an arms sales ban.
The US has implemented similar measures, with one peculiar exception: Sberbank is not included in the US sanctions, though it is in the European sanctions.
The bank sanctions are getting the most attention, but they are hardly devastating. I only had enough time today to look at the international borrowings of Sberbank, VTB, and VEB. Sberbank’s foreign debt borrowings total only about 4 percent of its total liabilities, and only a small fraction of those mature in the next year. Therefore, the sanctions put no immediate pressure on Sberbank, especially since it still can borrow from US persons. VTB’s foreign debt with maturities in 2014 and 2015 is no more than 6 percent of its total liabilities: I can’t be more precise because its financial statements only report broad maturity categories. VEB’s total Eurobond issues are about 8 percent of its liabilities: again, only a fraction of these are due in the next year or so.
Loss of this funding would be something of a strain, but the sums involved could readily be replaced by drawing on Russian foreign reserves and borrowing from non-EU and non-US banks.
What’s more, a little financial engineering permits these institutions to circumvent the effect of the sanctions. It seems that they can still enter into derivatives trades: derivatives are explicitly excluded from US sanctions. Since under the sanctions the banks can still borrow with 90 day maturities, they can create a synthetic long term loan with a fixed interest rate by borrowing for 90 days on a rolling basis, and enter into receive floating-pay fix swaps. Yes, there still is some risk here: if sanctions are extended to prevent even short term borrowings, the banks following this strategy would have a short swap position and no offsetting floating rate borrowings.
In brief, the sanctioned banks aren’t heavily dependent on European or US debt markets for their funding; the Russian government has the resources to cover this funding gap; and there is a somewhat riskier alternative (borrow short-term and hedge via swaps). Thus, although it would be unfair to say that the financial sanctions merely damage a few capillaries, it is definitely the case that they don’t come anywhere close to striking at Russia’s financial jugular. They are annoyance, and no more.
It is also important to note that the European sanctions do not target Rosneft. So the Russian oil company still has access to European (and Asian) debt and equity markets. As I noted before, this significantly cushions the blow on the Russian firm.
Insofar as the weapons ban is considered, it is largely symbolic because Russia builds most of its own weaponry. Predictably, existing deals are exempted. Meaning that France can continue with its sales of Mistral assault ships.
A bigger threat to the second Mistral sale is yesterday’s arbitration verdict in the Yukos litigation. If Russia doesn’t pay the $50 billion by January-a metaphysical certainty-the winning claimants can move to seize non-diplomatic Russian government assets in countries that are signatories to the New York Arbitration Convention. Conceivably the claimants could attempt to seize the second Mistral-the Vladivostok, ominously slated for service in the Med and Black Seas-while it is still in France. But no doubt the Russians and French could circumvent this by transferring ownership only after the ship had sailed to Russia. (As an aside, the main effect of the arbitration verdict will be to ensure employment of large number of lawyers for years, because the Russians will fight every attempt to enforce the award by seizing government assets abroad tooth and nail. It is a welcome verdict, but its immediate financial impact on Russia will be pretty much nil.)
The sanctions on oil equipment will have little impact in the near term, and since the European sanctions are time limited, their effect will be diminished even further.
In sum, the new sanctions are far beyond what had been imposed before, but they are still not that damaging to Russia. Putin can legitimately say “’tis but a scratch,” and not in the Black Knight, Monty Python, I’m not going to admit I’m wounded sense.
The United States in particular still has the power to leave Putin financially limbless and bleeding, pitifully claiming his invincibility. But that would require hacking away with a real banking broadsword: cutting off Russian access to dollar markets altogether. But there is no appetite to do this in the west: the Europeans had to screw up their courage to the sticking place to implement even these limited sanctions. And Obama has little appetite for this either: his sanction announcement today was delivered in a listless, phone-it-in fashion, before he ran off to fly to Kansas City for some silly event involving meeting people who had written him letters. He is obviously not engaged in this at all.
The Europeans and Obama believe that they are engaged in a nuanced strategy of graduated escalation that will convince Putin that continued attempts to subvert Ukraine through force will eventually result in Russia incurring unbearable financial costs, and that this will deter him from going further.
Ask the shades of LBJ and McNamara about how hardened dictators interpret graduated escalation. They interpret it as a signal of weakness, not resolve. If anything, it urges them to go further. I would anticipate that this will be true today, with Putin.