February 21. 2024. 8:04

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Will new sanctions against Russian companies backfire on the G7 countries?


The European Union has adopted the tenth-anniversary package of sanctions against Russia. New restrictions practically did not include private business, except for Alfa-Bank and Tinkoff-Bank. Meanwhile, there were talks of a much tougher set of sanctions that were supposed to affect many large private companies. But in the final document these positions disappeared from the list. Why does this seem like a right and far-sighted decision in the context of maintaining future relations between the EU and Russia?

Favourite market

Before the war in Ukraine, Russia was considered as one of the more attractive markets for investors from all over the world because of its political and financial stability. Russian companies were among the most generous in terms of dividends for their shareholders and had attractive multiples.

Most large Russian companies had a significant proportion of foreign members on their boards of directors, their accounts were checked by auditors from the Big Four, as well as had their strategic plans developed by consultants from McKinsey & Company and other global think tanks.

The Financial Times reported that, according to the Moscow Exchange, as of the end of 2021, foreign investors owned Russian shares worth $86 billion, in many of the largest Russian companies their share exceeded 30-50%.

After the outbreak of hostilities in Ukraine, sanctions were imposed against Russia. In response, the government of the Russian Federation limited the ability of foreign investors to sell their assets. It’s clearly not the best time to exit the Russian market, even if an opportunity would present itself — the shares of many corporations, such as Gazprom, VTB and TCS Group, have collapsed since February last year.

Delicate balance

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Let’s imagine that tomorrow the military conflict ended, Russian troops left the territory of Ukraine, a peace agreement was signed, and sanctions against businesses were eased or lifted completely. The value of Russian shares is rapidly recovering, and foreign investors are again getting full access to them. Given how undervalued the Russian market is today due to the political situation, it can be assumed that in the event of such a scenario, it will become possibly the fastest growing in the world.

It is important to note that the Russian government has so far avoided nationalizing the assets of foreign investors, and the companies themselves continue to be responsible to investors, finding opportunities to service bonds and pay dividends.

For example, Lukoil provided foreign holders of Eurobonds maturing in 2023 with the opportunity to receive payment directly, that is, without using the infrastructure of international clearing systems, in order to avoid delays in receiving funds.

In general, the situation remains suspended, but there are still opportunities to restore the normal trading regime for Russian shares in the future in foreign markets.

But that could all change with a wider spread of sanctions on the Russian corporate sector. If sanctions are also applied against other industries and private companies, this could nullify the obligations of Russian companies to foreign investors, pushing Russian regulators towards the idea of nationalizing assets.

In the first months of the war, the sanctions lists included many state-owned Russian companies and banks, as well as top managers close to the Kremlin. And it is all understandable.

The same can’t be said about the sanctions against private banks that serve millions of retail customers and are not connected with the military infrastructure and government contracts of the Russian authorities whatsoever. And in this sense, the recent inclusion of Tinkoff Bank and Alfa Bank in the EU sanctions list creates a dangerous precedent for further uncontrolled severance of relations.

Until recently, sanctions were applied in a balanced manner, which allows for preserving opportunities for cooperation in the future and protecting the interests of foreign investors in private Russian business so far. And the companies themselves keep a balance — many private companies, for example, Novatek and Lukoil, back in February-March 2022, made statements calling for an early peaceful solution to the conflict. By the way, it is in private Russian business that investors from the G7 countries have the largest share because private companies were characterized by more transparent corporate practices and high-quality management.

For example, the huge number of shares of the very same Lukoil, according to Bloomberg, are owned by the American investment company BlackRock — more than 2% of the company’s share capital. Another 2% is owned by the American investment company Vanguard Group. In total, investors from the US and the EU account for more than a third of the total volume of shares of an oil company, and this does not include investors, say, from the Middle East and from other regions of the world.

The illusion of "weakness" of sanctions

The idea to extend the sanctions to private Russian companies probably arose from the haste of American and European politicians in assessing the effectiveness of the already imposed restrictions.

Indeed, the first rounds of sanctions worked ambiguously in the beginning —in the first few months of the conflict in Ukraine, the Russian economy performed better than expected. The main reason was that Russia continued to make money on exports due to sky-rocket prices.

But since then the situation has changed. The embargo and the price cap on Russian oil and its derivatives undermined the revenue of the Russian budget.

At the end of January 2023, the federal budget had a deficit of 1.76 trillion rubles (over $23 billion), according to a preliminary estimate by the Ministry of Finance. Revenues amounted to almost 1.4 trillion rubles (about $19 billion), which is 35% lower than in January last year.

The embargo and the price cap on Russian oil and its derivatives turned out to be the solution – it is obvious that it is becoming increasingly difficult for Moscow to continue hostilities. But let’s not forget that G7 consumers end up paying for this policy by buying more expensive energy. In this context, additional sanctions against individual Russian companies look like a dubious measure: this will not directly hit the Russian budget and its military spending, but it will deprive US and EU investors of multibillion-dollar investments in the Russian market and complicate the inevitable restoration of business relations with Russia after the end of the war.

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