Bloomberg News

Putin Shrugs Off Sanctions as Allies Weigh Pariah Status

July 17, 2014

Vladimir Putin

Russian President Vladimir Putin leaves the BRICS-UNASUR Summit at Itamaraty Palace in Brasilia, Brazil on July 16, 2014. Photographer: Nelson Almeida/AFP via Getty Images

President Vladimir Putin shrugged off the most punitive U.S. sanctions so far over the unrest in Ukraine, even as some of his closest allies fretted publicly over the risk of isolation from the global economy.

Russian stocks fell to a six-week low and the ruble weakened the most against the dollar in four months after the U.S. curbed financing options for some of the country’s largest corporations, including oil producer OAO Rosneft (ROSN), gas company OAO Novatek (NVTK) and lender OAO Gazprombank.

Putin, in Brazil, said this “aggressive” response to the four-month uprising by pro-Russian insurgents in eastern Ukraine will only have a “boomerang effect” that will hurt the U.S.’s own interests. Andrey Kostin, though, head of state-run lender VTB Group, warned the measures may tip the economy into recession, lead to the “disintegration” of financing and turn Russia into an outcast of global capitalism.

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“Applying sanctions or large penalties can lead, unfortunately, to the disintegration of the financial system, essentially, and a rejection of further globalization,” Kostin said on Rossiya 24 state television from Australia. “They affect the interests of hundreds of thousands, millions of people and corporate clients.”

Billionaire Lament

The penalties are reversing two decades of Russian integration with the global economy and represent the biggest blow to Russian businesses since the collapse of the Soviet Union, worse than the financial crises of 1998 and 2009, said a billionaire who’s among the 20 richest men in the country.

All companies in Russia are affected because their U.S. and European partners are reluctant to do business with them, the billionaire said, asking not to be identified for fear of reprisal. Russia’s largest businesses will continue to suffer because Putin will only harden his stance, he said.

Waging Financial War

The latest sanctions came after travel bans and asset freezes aimed at Putin’s inner circle failed to force the country to meet an ultimatum to end support for separatists in two mainly Russian-speaking regions in eastern Ukraine. Putin, locked in the worst standoff with the U.S. and Europe since the Cold War, has denied fomenting the rebellion and says he’s trying to negotiate a peace settlement.

It’s very unlikely Putin will reverse course because he sees “strong Russian influence over eastern Ukraine and a de facto veto over potential Ukrainian membership in NATO as vital national interests,” New York-based Eurasia Group analysts Alexander Kliment, Cliff Kupchan and Zach Witlin said yesterday.

‘Monolithic’ State

This means that the U.S. will probably impose harsher sanctions later this year that will target whole sectors of Russia’s $2 trillion economy, which the European Union matching to a lesser degree, Eurasia said in a research note.

The new penalties will probably mean the economy will expand just 0.2 percent this year, if at all, as banks find it harder to finance projects, according to a government official who asked not to be identified because of the sensitivity of the matter. The current estimate is for growth of 0.5 percent.

While Putin’s inner circle is entirely loyal, some of the country’s leading businessmen are in secret dissent, “sitting quietly in fear, thinking how to save themselves,” said Olga Kryshtanovskaya, a sociologist who studies the country’s elite at the Russian Academy of Sciences in Moscow.

“There are different moods among business leaders -- some in the private sector may well be dissatisfied, but they can’t act against Putin because he is too strong and has too much public support,” Kryshtanovskaya said by phone from the Russian capital today. “The government is monolithic now.”

Recession Looms

Putin, a 61-year-old former KGB colonel, has seen his popularity surge since he annexed the Black Sea peninsula of Crimea from Ukraine in March, to a near record of 86 percent, according to the independent Levada Center’s latest poll.

Still, he’s struggling to shore up the economy, whose growth is at the weakest since a 2009 recession. Even before the latest measures, external debt markets have been largely closed to Russia since the takeover of Crimea.

International bond sales by Russian companies plunged to less than $5.4 billion in March through July 17 from about $21 billion in the same period last year, making it harder for them to meet their combined $191 billion of foreign debt payments due this year, central bank data show.

“The economic elite doesn’t support this policy of Putin because it is damaging their interests,” said Igor Bunin, head of the Center for Political Technology in Moscow.

Cold War

The latest attempt by the U.S. and the EU to squeeze Russia by limiting access to financing will probably push the economy into recession, according to David Riedel, president and founder of Riedel Research Group Inc. in New York.

“The country is teetering on the edge now and this will be enough to push it over,” Riedel said by e-mail.

Gross domestic product, dominated by natural-resource extraction, showed zero growth last quarter as capital markets seized up amid the growing international tension, according to the Economy Ministry.

The new U.S. sanctions will prevent Rosneft, Novatek, Gazprombank and state development bank Vnesheconombank, or VEB, from accessing U.S. debt markets for new financing with maturities longer than 90 days. They also bar VEB and Gazprombank from U.S. equity markets. Shares of Rosneft declined as much as 4.6 percent in Moscow today while Novatek fell as much as 9 percent.

The U.S. also imposed asset freezes on eight defense enterprises, while the EU said it would halt lending for projects in Russia by the European Investment Bank, the bloc’s in-house lender, and will use its influence to stop new lending by the European Bank for Reconstruction and Development.

Prime Minister Dmitry Medvedev said continued sanctions may push relations with the U.S. and its European allies back to what they were at the height of the Cold War and force Russia to boost defense spending even more than already planned.

“We’re going back to the 1980s in our relations with countries imposing these sanctions,” Medvedev said on state television.

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Brad Cook, Paul Abelsky


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