Anti-Russian sanctions: Fear of their desires

Famous London expert on the Russian economy, investment analyst who has worked for more than 17 years in Russia on an analytical directions in the “Troika Dialog” in “Sberbank CIB”, “Uralsib” and “Alfa-Bank”, and now founding partner “Macro Company -Advisory “, Chris Weafer (Christopher Weafer), wrote an article thoughts about Russian sanctions. This material is addressed primarily to the Western business, which has a serious impact on the political establishment, was of great interest. Here in London, perfectly remembered how ignominiously departed, British Prime Minister David Cameron at a meeting with President Barack Abama defiantly bravado and said that if not for the United Kingdom, Western Europe would never have introduced sanctions against Russia.

And today, for many people is still difficult to understand what motivated the British leadership, consistently destroying the fabric of bilateral relations, which is not easy to built up over many years. This topic is still not giving the rest of London. However, from a purely British tough pragmatism: not bad bargain it?

Chris Weafer, which is considered here in London, one of the most knowledgeable experts in Russia and the CIS, pretty straight argues in his article that if the intention of the sanctions imposed by the West on Russia, was to make the country’s leadership to change, then it is obvious that this idea failed if their intention was to damage the well-being of the Russian people, the certain result has been achieved, though small.

The analyst argues that the US administration and the EU will review the policy on sanctions at the end of this year, they expect that the Kremlin would expect to see the beginning of the easing of economic sanctions against Russia. Moscow, in this case, probably to make concessions and try to cooperate with the US and the EU, if the award will serve as the gradual reduction of sanctions in the economic sector in 2017. Chris Weafer sure that if Western sanctions policy continues, the real danger would be that Moscow will start to concentrate on the vector of strengthening its relationship with China and other Asian countries.

Vladimir Putin’s rating of support was 63% at the end of 2013, which is very similar to how the divided votes in the elections in March 2012. Since the beginning of the conflict with the West against the Crimea and eastern Ukraine, his approval rating rose to 80-89%. Anyone who has studied Russian history knows that the Russian people are rallying around their leader during a crisis. This is equally true for both Tsarist and Soviet era. In any case, Putin is elected president again in March 2018, unless he decides otherwise. All indicators point to the fact that he plans to stay on as president until 2024. Even if he resigns it does not entail a change of the regime - the system of government and leadership will not change.

Weafer sure that sanctions, especially when, say, the media portrayed them as economic and political attack on Russia, largely helped Putin. He notes that population surveys show that the overwhelming majority of Russians blame the sharp economic downturn is at the Western sanctions.

According to the author, in fact, the sanctions have only a minor contribution to the current recession: of course, the greatest cause of, for example, the fall of the ruble and the negative economic growth, was the fall in oil prices. But not only the reduction in oil prices caused the damage, it occurred at a time when the economy has already felt the slowdown due to the fact that the old model of development has started to lose its effectiveness. The new model is based on the already interweaving of countervailing factors such as the decline in oil prices, the growth of wages in the public and private sectors, as well as an increase in pensions, a strong “low base effect” and increase public confidence in the stability of the result, which brought Vladimir Putin’s government. This model began to take shape in 2012. In 2013, GDP grew by only 1.3%, or in other words, one-third of the performance of two years ago, despite the fact that the average oil price closer to the mark of $ 110 per barrel, and no geopolitical problems did not exist .

At the same time Chris Weafer noted that, of course, the sanctions have had some negative effect. Reducing individual food supply in winter 2014 led to inflation, albeit to a much lesser extent than the effect of the fall of the ruble dependent on oil. The influx of Western investment virtually dried up, except for a few major energy transactions, and in 2014 was also held another wave of capital outflows. Since the beginning of 2014, ie, for 2 years, Russian banks and industrial companies had to pay $ 250 billion foreign debt. This compares to 20% of GDP at the current exchange rate. Obviously, this could not happen without a significant impact on the economy. But such an attack would not stand no country in the world.

Chris Weafer philosophically observes that those who predicted or hoped for economic Armageddon that could develop into popular protests, is clearly wrong. And explain to their colleagues in the West: when there is no other way, the Kremlin is doing what it should. In this case, he supported the decision to stop the Central Bank control over the foreign exchange regulation. Simply put, the central bank let the ruble float freely. This rotary political move could save the economy virtually independently, creating a platform for greater stability and become the nucleus of a new industrial model emerged. With this almost makes sense all the Western pressure on Russia, which has already lasted a policy synergies.

The decision to allow the ruble to float freely go and fall sharply against the euro and the dollar was not taken lightly. Over the past 15 years, the Government has stated that the ruble is a symbol of economic stability in Russia. There is a risk that such actions could start a chain of events, endangering the entire banking system. However, this has not happened, partly due to the fact that Russians associate this step with Western machinations. At the moment, the price of the currency has become more or less stable and fluctuates around 60 rubles per dollar. If people saw this as a result of poor economic management and reforms of neglect, then the picture today probably would have been different.

The Russian economy is still in recession, but gradually comes out of it, and probably will start to grow in the fourth quarter of this year. If the rest of the situation does not change, i.e. It happens once the collapse of the oil or other emergency situation from the outside, then in 2017, we should see growth of about 1.5%, even if the current situation does not improve with the sanctions.

Thus, the sanctions no longer have any effect and the economy to adapt to new standards. Well, yes and no, - believes the author. collapse or crisis, the danger had passed, but that does not mean that the economy will automatically continue the rapid growth in the next few years. This is the moment when the sanctions may be a critical factor in the economic situation. This, according to Chris Weafer, explains the fact that the Kremlin, they say, is looking forward to the gradual reduction of the sanctions imposed. However, they do not take into account another factor - the sharp decline in inflation, which lets you use a wide range of possible tools for development.

It is obvious that the sanctions in connection with the situation in Crimea will not be relaxed for a long time, if ever. Let us recall the long life of the Jackson-Vanik amendment. Equally, there is no direct evidence that the ban on the use of dual-use technologies and some of the equipment and services in the oil industry produce any effect. The Russian oil industry is now at the peak of the post-Soviet era, and, in fact, intends to continue to grow as large companies such as “Rosneft”, managed to secure funding by selling their shares in some of the mining companies. One example could be the purchase of the Indian oil company ONGC 15% of the shares “Vankorneft” for $ 1.2 billion earlier this year.

According to the analyst, the sanctions in the economic sector differ. De jure, they block only state-owned banks and some other state-run enterprises from the Western credit. Chris Weafer draws attention to the fact that the de facto negative consequences of sanctions is much wider - global business has received from the West and the United States the main signal: Russia supposedly wrong and dangerous place to do business. He recalled that there are a number of examples where trade and investment agreements, which would not seem to fall under the restrictions de jure, have not been concluded simply because of the fear of punishment. An example of a succession of extremely heavy fines, the United States presented the EU banks for their attempts to circumvent US sanctions and “warnings” against Iran looming “big dark cloud” over those who wanted to and was ready to do business in Russia.

Summing up, Chris Weafer says: today, Russia’s economy is stable and out of the recession. However, the analyst believes that there are four conditions that will allow the Russian economy to return to sustainable growth of 3-4%. In his opinion, it is:

1) the government’s ability to keep the budget deficit from further growth;

2) an increase in the volume of foreign investments;

3) an increase in investment and expenditure in the country;

4) reducing the fear of sanctions risks.

Chris Weafer believes that maintaining sanctions on President Vladimir Putin’s chances to be re-elected will not have much impact. But the fact that during the next presidential term this will lead to a serious weakening of the cooperation with the Western countries, and of course strongly deploys the eyes of Russia to the east - to the analyst obviously. In this scenario, the development of Russia’s cooperation with the West on such a scheme is of no economic interest. And it’s true - the West for Rossi becomes simply uninteresting.

At the end Weafer gives good advice for those who are convinced that the sanctions must be maintained, and to leave Russia, “behind”, there is a saying: “Be careful of your desires.”

10 August 2016

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