Effective or not? Consequences of Russian sanctions for Ukrainian business

Author : Yuriy Hryhorenko

Source : 112 Ukraine

Russia introduced retaliatory sanctions against Ukraine, but a detailed study of the list of "victims" shows that measures will not affect private individuals, and many of those listed will also not suffer, because do not sell their products in the Russian Federation. At the same time, the list is open for expansion, and this may be the "hint" to the large Ukrainian businesses. In case of expansion of sanctions on fuel and energy companies, metallurgists, chemists and machine builders, the losses will be significant
22:37, 5 November 2018

October 22, Russian President Vladimir Putin signed a decree imposing sanctions against Ukraine. The government, headed by Dmitry Medvedev, worked quickly, and on November 1, a list of 322 individuals and 68 legal entities was published. These people and companies are subject to "blocking (freezing) non-cash funds, non-documentary securities, and property in Russia and a ban on the transfer of funds (withdrawal of capital) outside of Russia."

The mirror nature of sanctions is evidenced by the fact that the Russian government can lift the sanctions in case of cancellation of similar Ukrainian ones. However, the list can also be expanded. On the other hand, the fact that similar Ukrainian sanctions were imposed in 2017 (against 1228 individuals and 468 legal entities) and expanded in May of this year (up to 1748 individuals and 756 legal entities) speaks against mirroring.

It is strange that for more than a year, Russia has been thinking about such an "answer." Its actions in response to the EU and US sanctions were quick, so the sanctions against Ukraine look belated. After all, the war of sanctions and trade restrictions did not start in 2017-2018. The first package of sanctions against Russian companies was introduced by Ukraine in 2015. Even earlier, in 2014, Russia banned the export of all Ukrainian plant products to its territory, as well as meat. Earlier, milk was banned, as well as confectionery and canned fish. And in 2016, Russia banned the transit of Ukrainian products through its territory.

According to Viktor Shulyk, director of the IBI-Rating market research department, the countries exchanged painful strikes earlier when mutual restrictions were imposed on transit through the territory of Ukraine / Russia. These were painful decisions for the service sector, and a clear signal for commodity producers to seek options for diversifying sales markets. And although the volume of trade between countries has decreased significantly compared with the "pre-war period," not all companies can afford abandoning Russian products or markets.

Obviously, Russians were guided by several motives in drawing up the list: propaganda aiming at Russian public opinion, increased pressure on Ukraine, inflicting economic losses, “punishment” for anti-Russian criticism, influence on the electoral situation, trying to make certain personalities more compliant under the threat of more serious consequences, to prepare expansion of influence on Ukraine in the future, etc. At the same time, some experts and bloggers expressed the idea that the list looks like a “contract” between the authorities of Ukraine and the Russian Federation and that this is an “invitation to a future dialogue.”

“The issue of sanctions should be considered in two aspects. The first is protectionism at the intergovernmental level, when, under the sauce of sanctions, Russian producers in various industries are supported; the second is a warning to large Ukrainian businesses that can have a significant impact on policy of Ukraine. On the other hand, a similar assumption can be made with regard to individuals, as well as their investments in the Russian economy (including through third countries). In some countries, the financial intelligence service works well, which makes it possible to identify such operations. I think that the Russian Federation has achieved some success in this field," said Viktor Shulyk.

It is very difficult to combine all the above, therefore the list of sanctions is open, it can be expanded or narrowed. The fact that the logic of compiling the list is “lame” is evidenced by the fact that Russian Prime Minister Dmitry Medvedev instructed “to ensure the balance of commodity markets and prevent the negative impact of special economic measures on the activities of Russian organizations,” i.e. sanctions can strike on the local companies.

How many people suffered?

This list was more or less obvious in the middle of 2014 when the division into “friends” and “aliens” occurred. Even then it was clear who among Ukrainian politicians and big businessmen supported the new government, and who preferred to keep “diplomatic silence,” trying not to touch political topics.

There are no questions regarding politicians who are mentioned in the sanctions list. Well, perhaps, there is one: why the President Petro Poroshenko did not get into this list. The answer is clear - no sanctions could be imposed against the heads of state. For example, in the EU, the US, and Ukrainian sanctions lists we can’t see Vladimir Putin, although his entourage is represented in full. We also can’t find there Poroshenko’s main asset, Roshen corporation, but Russians included to the list his eldest son, Oleksiy Poroshenko, and businessman Olexandr Granovsky, who was close to the president. The list does not include Prime Minister Volodymyr Groysman - probably for the same reason as Poroshenko.

Similar "oddities" are observed in the attitude regarding other Ukrainian businessmen.

Rinat Akhmetov is not on the list, but there are top-managers of his structures - Oleg Popov, CEO of SCM Holding, and Yuri Ryzhenkov, head of Metinvest. Akhmetov’s assets were out of the Russian claims. Akhmetov's business partner, Vadym Novinsky, was also treated the same way: he was not mentioned, but Olexiy Pertin, Smart Holding CEO, was on the list.

Dmytro Firtash was not mentioned, but his main assets (Cherkasy-based Azot, Rivneazot, Nika-Tera port, etc.) were included in the sanctions list, as well as his business partner Ivan Fursin. The list also includes companies, which supplied raw materials to the Crimean Titan (now Ukrainian Chemical Products) of Firtash and to the Russian titanium monopolist VSMPO-Avisma.

Viktor Pinchuk and his assets (Credit-Dnipro bank, gas business, media assets and managers of the latter) appeared on the list, but the Russians did not touch his pipe and wheel capacities, which products are supplied to the Russian market. The appearance of businessmen of Viktor Yanukovych’s times, who have now withdrawn from active participation in politics — Olexandr and Serhiy Buryak (the former owners of Brokbusinessbank), Mykola Zlochevsky (Burisma Gas Company), Mykola  Rudkovsky, and Kostyantyn Hryhoryshyn (Energy Standard) is also interesting.

Business consequences of the Russian sanctions

Given the dubious quality of the list of subjects to sanctions and the lateness of its compilation, the economic effect will be insignificant. Large-scale economic damage to Ukraine, which Russia could inflict, refers to 2014-2016, and not to 2018.

Let us turn to the figures regarding the decrease in the importance of exports to Russia. According to the State Statistics Service, the export of Ukrainian goods to Russia in the first half of the year amounted to $ 1.8 billion (-5.4%), i.e. only 7.8% of total exports, while export to the EU countries was 9.8 billion dollars. In 2017, this indicator was at the level of 3.93 billion dollars (+ 9.6%, 9.1% of the share in all Ukrainian export). Recall 2013: $ 15 billion (-14.6%) and 23.7% of the total. After the fall of commodity exports to Russia 4 times, Ukraine has practically nothing to lose.

There are still no official assessments of possible economic damage (if you do not take into account the oral assessments of what is happening by the officials), but the National Bank expects that there will be no significant impact. Although Viktor Shulyk assesses the impact of sanctions on the Ukrainian economy as very significant, since "economic ties between Ukraine and the Russian Federation remain strong."

A significant part of the people on the sanctions list will not suffer from Russian sanctions for the simplest reason - they have nothing to take away or block in the Russian Federation. Everyone who had a business and assets sold them long ago and withdrew funds from Russia.

Related: Uzbekistan threatens Ukraine with sanctions

There were not so many Ukrainian assets in Russia before, especially if we compare it with the number of assets owned by Russian business in Ukraine. After the Maidan and the start of the war in Donbas, Ukrainian companies have difficulty in doing business in Russia, so most of them have tried or are trying to get rid of their assets in this country. Among Ukrainian entrepreneurs, Rinat Akhmetov probably owns the largest number of assets in Russia. DTEK’s (strategic holding company that develops business in the energy sector - Ed.) holding includes three mines located in Russia's Rostov region.

On the other hand, according to the State Statistics Service, over the past few years, residents of Ukraine did not hurry to get rid of their investments in Moscow - at the end of 2017, the volume of such investments amounted to $ 151.0 million. At the same time, part of the "Ukrainian investors" in Russian assets might be hidden under the guise of investments from various European and offshore jurisdictions. The amount of other property in the Russian Federation, which is controlled by residents of Ukraine, is difficult to estimate due to the use (both in the Russian Federation and in Ukraine) of common schemes aimed at providing additional confidentiality and protection of beneficiaries. At the same time, the real value may be greater than the volume of investments in the capital of Russian companies, which are declared by the State Statistics Service.

In the industry, the sanctions will affect manufacturers of medicine, farmers and food industry, gas station networks, retailers, manufacturers of mineral fertilizers, suppliers of titanium and uranium raw materials, etc. Regarding some positions of the list, the logic of sanctions is incomprehensible - these companies generally or practically do not trade with Russia. Therefore, getting under sanctions does not threaten them. They are on the list because of their owner, and not because of a “threat” to the Russian market.

Many companies quickly responded to their inclusion in the sanctions list. Their verdict is that sanctions will not affect the activity. This was stated by Myronivsky Hliboprodukt, Ferrexpo, and AvtoKraZ, Agromars, Ukrspyrt, Kernel, etc. On the other hand, Kernel has a business in Russia - a large grain terminal in Taman, which the company owns together with Glencore.

“The only painful part is the energy sector. In other segments of the economy, cooperation between countries is almost stopped, therefore, applying sanctions to them will no longer have any significant consequences for Ukraine,” explains Artem Kovbel.

In the fuel and energy sector, Russia has a huge field of influence: Russian companies sell oil products to Ukraine, liquefied gas, coal, supply our nuclear power plants.

From November of this year to the end of 2019, Russia imposed a ban on the export of light and dark petroleum products, as well as liquefied petroleum gas to Belarus. A certain part of this product was re-exported from Belarus to Ukraine, and a ban on Russian exports could also affect our market with a deficit and price rises. This situation might not be related to the imposed sanctions, but they appeared suspiciously at the same time.

The beginning of the heating season again raised the issue of providing coal for Ukrainian thermal power plants. Ukraine still buys a significant amount of coal in Russia (by the end of 2017, 57% of total coal imports). And here the potential threat is great. "If the main strike is on the energy sector, then the consequences will be bad. Whatever the government says, Ukraine is still dependent on Russia in the energy sector. Stopping or reducing the supply of coal, together with the start of the heating season, puts Ukraine in an extremely disadvantageous position. Even if Russia chooses the "light" option of sanctions – imposing some duties on one of the subsidiaries of DTEK (which imports Russian coal to Ukraine), this can lead to a jump in coal prices and increase the cost of tariffs for households and businesses," Artem Kovbel emphasizes. At the moment, neither DTEK nor its leader Maxym Tymchenko is on the list.

Also, a potential problem sector for sanctions is Ukrainian exports of engineering products ($ 0.8 billion, or 21.6% of merchandise exports to the Russian Federation in 2017), chemical products (by $ 0.7 billion, or 18%), and metals. Over 8 months of this year, deliveries of Ukrainian steel products and pipes to Russia increased by 28% compared to the same period in 2017 and amounted to 1.5 million tons. The largest exporters of Ukrainian steel products in the Russian Federation are Rinat Akhmetov's companies - Azovstal, Zaporizhstal, which did not fall under the sanctions (unlike the head of Metinvest).

In general, in the case of real sanctions, Ukraine can get a shortage of raw materials and fuel, as well as a serious contraction of sales markets for products of individual companies. Reorienting to other directions quickly will be extremely difficult thing. The strength of the "strike" for Ukrainian exporters may be in the range of 5-30% of the current volume - depending on the approach used.

The ideas of introducing a visa regime and interruption of the railway communication could complete the process of "separation" of our countries as they will complicate the lives of ordinary Ukrainians and millions of our guest workers in the Russian Federation.

Related: Ukrainian MPs appeal against Parliament voting on sanctions against 112 Ukraine and NewsOne

Related: EU considers Russia’s sanctions against Ukraine unfounded

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