Sanctions on Russia are ‘bad news’ for Europe, says financial analyst | Video
European CEO speaks to financial analyst Chris Skinner to discuss what the implications of the UK and Europe's sanctions on Russia will be
British Prime Minister David Cameron has warned that cronies of the Russian president are likely to face increasing sanctions in the UK and Europe; a move designed to put pressure on Vladimir Putin over the Ukraine conflict. European CEO speaks to financial analyst Chris Skinner about what this means for the financial markets.
European CEO: Well Chris, looking at this from a purely financial perspective, who will be the losers from the sanctions imposed on the Russian billionaires?
Chris Skinner: Well, the aim is obviously that it will be Russia itself that will be punished, and feeling the pain of these sanctions. And certainly there will be some pain for Russia, but sanctions normally don’t really work effectively, because all it does is make the people poorer while the political objectives remain the same.
Equally for Europe in particular there will be a lot of pain too. We’re going to see around £32bn, around €40bn, of lost trade this year, because Europe does most of its trade with Russia. And so for Europe, it’s bad news.
[S]anctions normally don’t really work effectively
European CEO: Well what exactly are the sanctions?
Chris Skinner: The sanctions go across multiple industries, from technology through energy, and into banking and financial services.
In particular in banking, for example, the Russian banks that are owned more than 50 percent by the government, such as Sberbank, are no longer able to use bond or debt funding in the UK markets or European markets. And that’s going to cut the ability to support those banks this year.
European CEO: Well Russian billionaire Gennady Timchenko said one of the results of these sanctions is he can no longer use Visa or Mastercard, and as a result he’s instead gone to use UnionPay, the Chinese payment system. And there have been rumblings that banks will move away from the mainland EU to Hong Kong; do you think these sanctions are really going to further fuel that?
Chris Skinner: Oh absolutely. What we’re seeing is a large flow of funds right now into Hong Kong, and so the Hong Kong monetary authority has to pump about HKD 9bn into the Hong Kong currency to stop a run on that currency, and seeing its valuation going through the roof.
So what we’re really seeing here is political posturing, which will see Russia more aligned with China. The US dollar being impacted potentially as a reserve currency in the longer term. And a restructuring of global power. Because one of the things that comes into play here is the dollar is the reserve currency of the world, but since 2001 there’s been a nine percent reduction in dollar reserves worldwide, from 71 percent to 62 percent today.
We’ll see that continue, and this is just going to fuel that further.
So as Russia moves dollars and investments out of America and into China, China becomes stronger and America becomes weaker.
European CEO: How legal is it to put pressure on individuals to then in turn put pressure on a government?
Chris Skinner: Well there are particular sanctions for about 22 individuals who are the key allies of Vladimir Putin. And for those individuals, their ability to travel and trade is cut back immensely; as in, they’re going to have to stay in Moscow.
To a large extent that may not be a big deal, because they’re not going to be supported by Vladimir Putin. So it’s not going to be an issue, to spend a year in Moscow while you know you’re going to be protected.
European CEO: Well putting aside a person’s personal wealth, why haven’t these sanctions targeted companies more? Surely that would have more of an impact?
Chris Skinner: Well there are some against companies. But if you take the energy markets, Europe depends on Russia for gas, so you can’t really attack Gazprom, because then you’re cutting off your nose to spite your face. Because that’s the supply of gas to Europe for the winter.
I think the big concern is another world war
Equally there are other aspects of the markets that end up being tit-for-tat. So for example, we stop the Russian banks raising funds in London, and Russia says we won’t import any apples from Poland, or fruit and vegetables from Europe. So everyone loses.
European CEO: Well talking about cutting off your nose to spite your face, a lot of these Russian oligarchs pay tax in places like the UK. So surely this will really impact us as well?
Chris Skinner: If you look at the billionaires who are in Vladimir Putin’s regime, many of them have invested heavily in property overseas, and in particular in London.
About 61 percent of the newly-built properties last year went into foreign ownership, and about two percent of the super-rich houses in London are owned by Russian billionaires and millionaires.
Now what’s happening is we’re seeing Switzerland open up its market for foreign investment in its property markets. And overall in the first quarter of this year, we saw about $51bn invested overseas by the Russian super-rich. So we are seeing a lot of flow outside Russia, into the stable markets.
European CEO: Well Switzerland has now blacklisted some high-profile Russian billionaires to prevent them circumventing these sanctions. Are there any other loopholes out there?
Chris Skinner: There are many loopholes. If you look at the whole way that trade is done between Russia and these markets, quite often it’ll be what we call layered or nested structures of investments through foreign overseas companies that are owned by other individuals who are not blacklisted. So you can quite easily find ways aorund the rules.
European CEO: How likely are the sanctions to affect flow of capital into the EU?
Chris Skinner: We’re going to see as I say, a contraction issue of about three percent of the European gross domestic product because of the sanctions against Russia.
Russia equally is going to see a weak economy become even weaker.
To a large extent that affects the individual people in Russia, rather than the government and the political objective.
European CEO: Well Russia has already started hitting back, as you mentioned, with these sanctions. They’ve already put their own sanctions on Polish beef, for example. What’s the worst they can do? How concerned should we be if they do start really hitting back?
Chris Skinner: Well I think the big concern is another world war.
Right now, economic and financial sanctions, and using leverage of the weapons of finance against the economy of Russia, is the most that we want to do while we’re in a position to avoid a war.
European CEO: And back to financially speaking, who’s going to be the losers if Russia really, you know, gives us the best they can in terms of sanctions?
Chris Skinner: I think everyone is going to be a loser.
Europe does about 10 times more trade with Russia than the Americans do, but the Americans will see a loss of investment and support in their bank operations in Russia, and vice versa.
These sanctions that have just been introduced primarily target the energy, technology, and financial markets. The City of London gets about 1.1 percent of its earnings from dealing with Russia and the Russian banks, so that’s an impact. But it’s not going to damage the City of London immensely.
I think everyone is going to be a loser
The French kept their defence contracts. The Germans have kept many of their contracts with Russia, because those were in the past. It’s future contracts that will be impacted, and there will be an impact in Europe of about €40bn of lost trade this year with Russia. And most of that will be coming from some of the markets like Poland, that can no longer export fruit and vegetables to Russia, because Russia’s said that it doesn’t want to deal with the Polish markets anymore for those particular commodities.
Some of the smaller nations I think will feel the hurt a lot more than the bigger ones, and bear in mind that this is just as Europe is going through a recovery from a massive sovereign debt crisis and recession.
And all in all, nothing is ever going to come of sanctions, from a positive viewpoint. All that happens is a lot of negativity, and you just hope that at the end of it, it impacts the political objective. Which is that Russia wants to annexe Ukraine, and we want to avoid that.
That’s the whole focus here. And the financial instruments being used to try and influence that agenda is obviously a strong influence, but it’s not going to actaully change the agenda.
What will change the agenda is Vladimir Putin, and whether he actually decides to back down. And using that phrase ‘back down’ – it’s probably the last thing he’ll ever do.
European CEO: Chris, thank you
Chris Skinner: Cheers.