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Thursday 31 July 2014

Russia Defiant In Face Of New US, EU Sanctions


Moscow was defiant on Wednesday in the face of sweeping US and EU sanctions designed to punish its continued backing of separatists in eastern Ukraine, promising that Russia would localise production and emerge stronger.

However, analysts predicted that the key sectors of finance, defence and energy that have been targeted will suffer in isolation from the west.
The EU agreed on Tuesday evening to cut off Russian state-owned banks from European capital markets. It was joined promptly by the United States, which denied Russias state-owned banks VTB Bank OAO, Bank of Moscow and the Russian Agricultural Bank access to the US economy.
The EU also banned any trade in arms and the US prohibited transactions with Russias United Shipbuilding Corp, which it classified as a defence company. Both the EU and the United States will ban export of technologies to Russia for deep-water, Arctic or shale oil drilling. The sanctions from the EU, which does far more trade with Russia, will be reviewed in three months. Russia called the new sanctions destructive and short-sighted.
Such decisions by Washington can do nothing but further aggravate US-Russian relations and create an utterly unfavourable environment in international affairs, where cooperation between our states often plays a decisive role, Russias Foreign Ministry said in a statement.
Shares in VTB, Russias second-largest bank, dropped by 3% with the start of trading on Wednesday losses that were later mostly regained. The Russian stock market on the whole actually grew, with the MICEX and RTS indexes rising by about 2%.
Bank of Moscow said in a statement it was oriented on the domestic market and its business wouldnt suffer at all from the imposed sanctions. Russias Central Bank promised to prop up banks hit by sanctions. If necessary, appropriate measures will be taken to support these organisations in order to protect the interests of their customers, depositors and creditors, it said in a statement.
But the measures will likely raise the cost of credit in Russia and take their toll on the economy. Andrei Klepach, the deputy chairman of the state-owned bank VEB, said on Russian television on Tuesday that sanctions could halt economic growth or even lead to a recession in the country. Previously, Russia has forecast a 1% growth in gross domestic product this year although the IMF downgraded its forecast to 0.2% this month citing capital flight and falling investment amid western economic pressure.
In general, this will lead to a credit getting more expensive, but it will be a pretty delayed effect, said Vladimir Tikhomirov, chief economist at BCS consulting. Russian banks do have financing from abroad but the larger part of financing is coming from the internal market.
Reacting to the sanctions, deputy PM Dmitry Rogozin in charge of Russias defence and space industries wrote on Twitter: Obamas decision to place sanctions on the United Shipbuilding Corporation are a sure sign that Russian military shipbuilding is becoming a problem for Russias enemies.
Alexei Pushkov, chairman of the parliaments foreign affairs committee, meanwhile levelled his aim at Obamas personal legacy. Obama wont go into history as a peacemaker everyone has already forgotten about his Nobel Peace Prize but as the US president who started a new cold war, he tweeted.
As hot air was vented on social media, the foreign minister, Sergei Lavrov, said on Monday that Russia for now would not fall into hysterics or take retaliatory measures. I assure you, we will overcome any difficulties that may arise in certain areas of the economy, and maybe we will become more independent and more confident in our own strength, he said.
Despite Lavrovs statement, a group of ruling party MPs said on Tuesday they would introduce legislation to ban auditing and consulting companies from aggressor countries including the Big Four auditing firms Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers. Russias consumer watchdog placed a ban on some fruits and vegetables from EU member Poland.
The Russian president, Vladimir Putin, said at a meeting with representatives of Russias military-industrial complex on Monday that they could turn to alternative markets for arms components and that any technological difficulties suffered as a result of sanctions would ultimately prove beneficial.
Russia has a large arms trade with France, purchasing not only two Mistral warships from the country but also licensing to produce thermal imagery devices and electronics for its Su-30 fighter jet. Although the Mistral warship contract will go through, new trade in arms components with Europe will be halted. In light of sanctions, Russia is likely to turn toward the Asian market to supply such components, Igor Korotchenko, editor of the National Defence journal told the newspaper Izvestia.
Independent defence analyst Pavel Felgenhauer, however, said that despite Putins optimism, replacing many of the foreign-sourced components is a sheer impossibility 90% of defence industry electronics are produced in the west, he said, arguing that even intercontinental ballistic missiles are not fully Russian-made.
Self-dependence and doing everything on your own soil, that didnt work even in medieval times, and right now practically all Russian weapons systems use foreign components or materials, Felgenhauer said.
The restrictions placed by the EU on the oil industry are likely to be painful but not crippling. BP, which owns nearly 20% of Russias state-owned oil major Rosneft and has been cooperating with it to explore Arctic deposits, said further sanctions could have a material adverse impact on our relationship with and investment in Rosneft, our business and strategic objectives in Russia and our financial position and results of operations.
A drilling rig that ExxonMobil and Rosneft will operate as part of its exploration project in the Arctic Ocean already left port in Norway two days after Malaysian Airlines flight 17 was downed. Further Arctic exploration projects will be put into doubt, however.
Ildar Davletshin, an oil analyst at Renaissance Capital, said western technologies to drill in the Arctic will not be really needed until conventional reserves begin drying up by 2020. In response to sanctions, Rosneft will likely seek to divest from non-core assets and decrease its participation in projects in Venezuela and other countries, he said.
Its a very connected industry, [high-technology] components could be produced in Russia or China but it will take time to re-orient, he said.

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