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Influence of new US sanctions on Russian economy

Author : Oleksander Valchyshen

23:18, 3 August 2017
Influence of new US sanctions on Russian economy

Author : Oleksander Valchyshen

The United States has completed the introduction of new sanctions against Russia, Iran, and North Korea

23:18, 3 August 2017

Read the original text at eurointegration.com.ua.

 

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The United States has completed the introduction of new sanctions against Russia, Iran, and North Korea.

This initiative is presented as a fundamentally new step in the destruction of Russia's economy. However, is this thesis true? What is the impact of the new US sanctions on the Russian economy?

In my opinion, the current set of strengthening sanctions is still too weak in terms of the serious punishment of aggressive international behavior of the leadership of the Russian Federation.

For example, with regard to the financial sector, we are talking about a certain increase in past restrictions and sanctions on the use of the US financial system. This increase, for example, might aggravate the financial innovations that the Russians use to in order to show the international community that they are doing well.

Examples of such financial innovations are complex international transaction schemes, the most notable of which were demonstrated by the Russians during the recent "privatization" of 19.5% stake of Rosneft.

Related: Sanctions against Russia and the gas war

Against the background of surprise and financial press, VTB Bank, which was under sanctions, was a member of an international consortium (involving a Swiss company Glencore, Qatar's sovereign investment fund and Italian bank Intesa) on the sale of state shares, which eventually ended up in the hands of unannounced private investors.

Although the current sanctions do not forbid US investors to buy the debt of the Russian Government and trade with VTB, these actions on the placement of public debt among American investors appear to be as a weakness of the sanctions regime itself.

With the new sanctions package there is the possibility of introducing a ban on American citizens and financial institutions to invest in Russian sovereign debt, including the "full range of derivatives" on it. Such a ban will not be introduced automatically after the enactment of the law - it might appear after a public discussion of a report by congressmen, prepared by the US Treasury together with the State Department and the Director of National Intelligence.

Related: Juncker threatens with counter measures if US anti-Russian sanctions harm EU

This is not a lethal step for the Russian economy - it is capable of creating a new wave of volatility on both the external and domestic markets of sovereign bonds of the Russian Government on a short-term basis. The strategic direction in the development of the Russian economy is the use of the internal financial system, therefore sanctions are only a catalyst for the acceleration of such a transition.

Here we should recall the history of the Eurobond market. It arose in the 1960s, largely due to foreign exchange balances in US dollars on the accounts of Soviet power in the US banking system. One of the main impetus for the creation of this market, which was a significant innovation, was the desire of the Soviet authorities to avoid controlling the US Federal Reserve and, at the same time, generating income (the Soviet bank in London, the Moscow Narodny Bank, in the future MNB, played a leading role there. Subsequently, more and more players began to be involved in this market and it became a full-fledged element of the international financial system).

Consequently, Russian financial engineering has a good tradition of adapting and locating the paths under pressure from external constraints.

Related: Anti-Russian sanctions law includes giving 30 mln USD for Ukraine’s energy security

In the 1960s, the geopolitical situation was no less difficult - the Cuban crisis in 1962, the invasion of Czechoslovakia in 1968. In response, the Americans then resorted to sanctions - they blocked the remaining US dollars, which were on the accounts of the London MNB Bank, opened in the US financial system. This was a significant step, since MNB was the main (if not the only) settlement bank for trade with the West not only for the USSR, but also for other socialist countries. This is the current equivalent of blocking foreign exchange reserves of the Russian Federation, which are located in the United States.

Related: Merkel vs. Trump: Will Germany be able to challenge new sanctions against Russia?

Then, the Soviet financiers were able to get out of the difficult situation not least by flooding with other developed countries that were trying to calm aggressive geopolitics through the more active development of economic ties between the West and the East.

This time the US sanctions do not include blocking Russian accounts in the US financial system, but threaten the sovereign debt of the Russian Federation and its derivatives (both domestic and foreign markets). As for me, the more severe sanctions regime means combining both blocking of accounts and prohibition on dealing with debt.

It is possible that this new wave of sanctions from the technical point of view will be considered by the Russians as a challenge to new innovations in the international financial system. It is possible that in an extreme situation, the government of Russia will turn to financial innovations through Asian financial centers, strengthening cooperation with China.

Related: US anti-Russian sanctions is resolute signal of support of Ukraine, - Poroshenko

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