The tenth anniversary package of sanctions against Russia has been adopted by the European Union. Except for Tinkoff-Bank and Alfa-Bank, the new restrictions did not apply to private business. There were also talks of tougher sanctions, which were to be applied to large private companies. These positions were not included in the final document. This seems like a wise and logical decision, especially in light of future relations between Russia and the EU.
Favorite market
Russia was a popular market for investors before the conflict in Ukraine. This was due to its financial and political stability. Russian companies had attractive multiples and were some of the most generous shareholders in terms dividends.
Large Russian companies often had a large number of foreign directors on their boards. Their accounts were reviewed by the Big Four and their strategic plans were developed by McKinsey & Company consultants.
According to The Financial Times, Russian investors held Russian shares in the amount of $86 billion as of 2021 according to the Moscow Exchange. In many large Russian companies, their share was over 30-50%.
Russia was hit with sanctions after the conflict in Ukraine. The Russian Federation imposed sanctions against Russia in response. Foreign investors were not allowed to sell their assets. This is clearly not the best time for investors to exit Russia’s market. Many corporations such as Gazprom and VTB have seen their shares fall since February 2013.
Delicate balance
Let’s say that the military conflict is over, that Russian troops have left Ukraine’s territory, and that a peace deal has been signed. The sanctions on businesses have been lifted or reduced. Foreign investors have full access to Russian shares, as they are rapidly recovering in value. It is easy to assume that Russia’s market will grow rapidly in the future, given its current political state.
It is important that investors note that the Russian government has not yet nationalized foreign investors’ assets. Companies continue to be responsible for investors and find opportunities to pay dividends and service bonds.
Lukoil, for example, offered foreign holders of Eurobonds due in 2023 the chance to receive payment directly without the use of the infrastructure of international clearing system, to avoid any delays in receiving funds.
The situation is still suspended in general. However, there are still chances to restore normal trading for Russian shares on foreign markets in the future.
This could change if sanctions are imposed on more Russian corporations. If sanctions are applied to other industries or private companies, it could negate the obligations of Russian companies towards foreign investors. This could push Russian regulators toward the idea of nationalizing assets.
The sanctions lists contained many Russian state-owned companies and banks as well as high-ranking Kremlin officials in the initial months of war. It is all quite understandable.
This is not true for the sanctions on private banks that provide services to millions of customers. They are not linked with any military infrastructure or government contracts of Russian authorities. In this context, the recent addition of Tinkoff Bank to the EU sanctions list and Alfa Bank to it creates a dangerous precedent for uncontrolled severance.
The sanctions were used in a balanced way until recently. This allows for future cooperation and protects the interests of foreign investors in Russian private business. The companies also maintain a balance. Many private companies, such as Novatek and Lukoil made statements in February-March 2022 calling for a peaceful resolution to the conflict. It is the Russian private sector that has the highest share of G7 investors. This is because private Russian companies are more transparent and have better management.
The American investment firm BlackRock owns more than 2% of Lukoil’s shares, which is over a quarter of its share capital. The American investment firm Vanguard Group owns another 2%. The total share of oil companies owned by investors from the US, EU, and other countries is more than one third.
The illusion that sanctions are “weak”
The idea of extending sanctions to private Russian companies was probably born out of the haste of American politicians and European politicians when assessing the effectiveness the restrictions already in place.
The first round of sanctions was ambiguous at the beginning. In fact, Russia’s economy performed better than expected in the initial months of conflict in Ukraine. Due to skyrocketing prices, Russia was able to continue to earn money from exports.
However, the situation has improved since then. The revenue from the Russian budget was hampered by the embargo and price caps on Russian oil and derivatives.
According to preliminary estimates by the Ministry of Finance, the federal budget was in deficit at 1.76 trillion rubles (more than $23 billion) as of January 2023. The revenue was almost 1.4 trillion rubles, or $19 billion. This is 35% less than January last year.
The solution was the embargo and price caps on Russian oil and derivatives. It is clear that Moscow is finding it increasingly difficult to keep hostilities going. We must not forget that the G7 consumers end-up paying more for this policy through higher energy prices. Additional sanctions against Russian companies seem a questionable measure in this context. While it won’t directly impact Russia’s budget or its military spending, it will reduce the US and EU investments on the Russian market by multibillions of dollars. It will also complicate the inevitable restoration business relations with Russia.
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