Tuesday

21st Feb 2017

EU hits Russia's largest banks, imposes arms embargo

Russia's largest and second largest banks from Friday (1 August) will no longer be able to raise money on EU markets, as economic sanctions enter into force.

Published in the EU official journal on Thursday, the sanctions are the hardest-hitting so far and go beyond the US, which targeted smaller Russian lenders.

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  • Russia's top lender can no longer access EU money markets (Photo: sberbank.ru)

The EU reaction comes in response to Russia's continued support and supply of weapons to pro-Moscow rebels in east Ukraine despite widespread belief they shot down Malaysia Airlines flight MH17 using a Russian-supplied missile, killing 298 people, mostly EU citizens.

Under the new sanctions regime, Sberbank, Russia's top lender, and VTB Bank, its second biggest bank, will no longer be able to raise debt with a maturity longer than 90 days in the EU.

The same applies to Gazprombank - the lender associated with Russia’s gas champion - and two others: Vneseconombank and Rosselkhozbank.

Sberbank, which is the third biggest bank in Europe, has €1.2 billion in debt due for refinancing by the end of this year. VTB has even more and has also been banned from US capital markets.

The Central Bank of Russia on Wednesday promised to chip in and help banks targeted by the EU and US sanctions.

But experts doubt the central bank can help for long, as funding requirements and bond maturities loom large over the next 12-18 months.

In addition to the financial sector sanctions, the EU adopted a ban on exports or imports of Russian arms.

The export ban only applies to future contracts.

A list of “dual use” goods - which can have both military and civilian applications - is equally banned if the end beneficiary in Russia is a military firm or organisation.

The EU also imposed a ban on sales of all pipeline-related and other specialist equipment needed for shale oil, deep water, and arctic oil exploration.

The same equipment can be exported for gas exploration, but a new EU authentication regime will aim to stop abuse.

Exceptions

Exceptions to the arms trade ban were introduced to allow eastern EU member states - who still have Soviet-era defence material - to maintain their "existing capabilities".

The arms embargo also allows France to go ahead with the delivery of its two Mistral warships, worth €1.2 billion.

In the financial sector, European subsidiaries of the Russian banks will not be hit by the sanctions, in order to allow their functioning in countries like Slovakia and Cyprus.

The sanctions regime is in place until 31 July 2015, but will be "kept under constant review", meaning that it can be scaled back or scrapped altogether if Russia changes course.

It can also be renewed or changed if the Council of EU states "deems that its objectives have not been met".

A first revision of the sanctions regime will take place "no later than 31 October 2014, in particular taking into account their effect and the measures adopted by third states," the decision says, in reference to the US and other non-EU countries which may impose sanctions on Russia.

Constantin Gurdgiev, a Russian economist at Trinity College Dublin, told this website he is sceptical the sanctions will work.

"I see some pain in the short time, in the long term there will be opposing effects, including some positive ones for Russia. In the end, however, these sanctions are unlikely to achieve targeted political objectives," he said.

On the five banks, Gurdgiev said banning their access to EU capital and funding markets will hurt them, forcing them to cut lending.

"Another cost is to the growth potential: some banks were moving actively into Europe or had plans to do so. These plans are now dead and existent operations outside of Russia are going to come under significant strain," he noted.

On the other hand, as Western banks reduce their operations in Russia, some of their clients will migrate to Russian banks. Also the fact that Russian banks will hold less debt in euros and US dollars may prove beneficial in the long run, when sanctions are finally lifted, he said.

Cuban Missile Crisis 2.0?

As for what might change Russian leader Vladimir Putin's mind, Gurdgiev said nothing will so long as there is no guaranteed neutrality for Ukraine - no membership of Nato - or a compromise in that direction.

"Some in the West are betting that internal pressures will 'shift' the Russian position. I doubt that. The West is pushing him harder and harder into a corner, but the corner is where Russian leaders find themselves usually most comfortable in, as it secures broad popular support."

Asked if Europe is at risk from a widening of the Ukraine conflict, the economist said it looked more like another Cuban Missile Crisis "where stepping away from the brink took some serious ego bruising".

"And it took a more pragmatic and stronger US President. And eventually it cost [the then Soviet leader] Khruschev his career. The key today is to find an enforceable and acceptable compromise. Absent trust and with no independent brokers to act as any agreement guarantor, this is a much harder task than in 1962," Gurdgiev said.

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