The effect of sanctions on Russia

[LONDONER]

From Bloomberg Businessweek

As Investors Flee, Russia Inc. Is Feeling the Pain
By Carol Matlack

Want to know how President Vladimir Putin’s showdown with the West is affecting Russian business? Ask retailer Detsky Mir.

Detsky Mir (Children’s World), which started as a Soviet-style department store across from KGB headquarters in Moscow, rode demand from a growing middle class over the past two decades to become a $1.1 billion-a-year company. It now has more than 200 stores selling children’s clothing and toys in dozens of Russian cities. Last fall it announced plans for an initial public offering on the London Stock Exchange early in 2014.

Then came Putin’s grab for Crimea, and now Detsky Mir has put the IPO on hold, according to a person with direct knowledge of the situation. “In these conditions [the company] will not do anything,” the person said.

Detsky Mir isn’t alone. Even as Europe and the U.S. have refrained from imposing all-out economic sanctions, Russian companies are suffering as investors flee the country. Canceled IPOs, suspended loan negotiations, plummeting share prices—all are part of an estimated $50 billion in private investment that has left Russia since Jan. 1, according to economist Neal Shearing of Capital Economics in London.

The Russian unit of German retailer Metro may scratch its planned London listing, as shares in Lenta, another Russian big-box chain, have slumped more than 17 percent since the stock’s Feb. 27 debut on the London exchange. The crisis also could derail some $8 billion in loans being sought by major Russian companies such as steelmaker Novolipetsk and mobile operator VimpelCom. “Until the situation stabilizes, there will be fewer international banks willing to lend in Russia,” Dmitry Dudkin of investment bank UralSib Capital in Moscow told Bloomberg News earlier this month.

At the same time, these companies’ stocks are getting hammered. Shares of Novolipetsk, controlled by one of Russia’s richest men, Vladimir Lisin, are down more than 34 percent this year. VimpelCom, controlled by billionaire Mikhail Fridman, has dropped 32 percent. According to the Bloomberg Billionaires Index, Russia’s 19 richest people have lost $18.3 billion since the Crimea incursion began on Feb. 28.

Businesspeople “are very scared,” Alexander Lebedev, who owns the Moscow-based investment group National Reserve, tells Bloomberg News. “There could be margin calls, reserves might be drawn down, exchange rates may fall, and prices will rise.”

And yet, business leaders have remained almost entirely silent, as the Kremlin in recent years has tightened government control of the economy. “The business community is freaking out—they’re terrified,” says Ben Aris, the editor and publisher of Business New Europe in Moscow, an online journal covering business and finance in the former Soviet bloc.

Ordinary Russians also would be hurt by capital flight. If the outflow continues at its current pace, it will total $70 billion during the first quarter, some 3.2 percent of gross domestic product. “There is a real risk that this could push Russia into recession this year,” says Capital Economics’ Shearing. Adding to the pain, the ruble has plunged 22 percent over the past year—a blow to shoppers in a country where imported goods account for more than 40 percent of consumption.

Despite its oil, gas, and mineral riches, Russia has suffered for years from a dearth of private investment that could diversify its economy and cushion it against commodity-price fluctuations. Consumer-facing companies such as Detsky Mir, Lenta, and VimpelCom looked set to help remedy that problem. Instead, Russia now will suffer an “absolute decrease” in private investment, says Bernie Sucher, an American entrepreneur and investor who has worked in Moscow for more than 20 years. “This is going to be an enduring setback for the economy,” he predicts.

Some in Putin’s inner circle seem to think the government can step up public investment to compensate for the loss of private capital. But, Sucher says, that approach is doomed to fail. Russia has already lost ground on competitiveness as the Kremlin has played an increasing role in the economy, he says. “The state, no matter how rich it is, cannot make up for the quality, efficiency, and competitiveness of private capital.”

[nfisher1226]

Sounds eerily familiar. It's the Russian people who will suffer.

[MisterTinkles]

I never understood this concept.

Has Russia ever enacted sanctions on the USA? If so, I have never heard of it.

I did not realized that the USA exported anything to Russia, much less anything that the USA does would affect Russia.

[nfisher1226]

There are in fact no sanctions in place as of now, to the best of my knowledge. Only a lot of posturing, but what the article goes on to say is that a lot of business is fleeing the country.

But you are correct that Russia has never been dependent on the United States, or any other country for that matter. Although there was a brief period after the fall of communism that they accepted some economic aid. Mostly, there is economic dependence in the form of the investment by private business. The Russian nation can probably survive just fine without that, but as I said, the Russian people will suffer because of it.

[partis]

i think Obama was right WHEN he said… "Russia is on the wrong side of history and alone"

Whatever will come of all this!

[freelandia]

We're cancelling our Kaspersky Lab.

[Pix]

I recall reading somewhere that economic sanctions against the Soviet Union contributed to its collapse. Of course businesses wouldn't invest in the country for obvious reasons and they also didn't get along with China. It's been a long while but I recall thinking it was amazing the Soviet Union lasted as long as it did (a country with less resources never would've managed to) under those reasons alone.

Since the fall the country has been so absurdly corrupt, and only gotten worse under Putin so that many businesses in Russia have, when possible, moved their companies to other countries where they couldn't be outright robbed by the government.

And now with Russia's latest stunt I'm not surprised that many people, especially on the same continent, don't want to fuel their economy, not when any of them might be next. Though Putin himself has generally come off as a moderate there are plenty of prominent Russians who have made it no secret that they believe Russia should become a world power again, including the idea of Empire, one that expands its borders, particularly to the West, and now many over there are remembering that.

[putresVigil]

More saber rattling and posturing at the cost of the people whose shoulders the elites stand upon to achieve their status, I reckon. Years back, you could always blame the other guys for your hardships. I wonder if that will work as well in the world of the internet. I guess we will find out. The wheel of time rolls on and on and the pendulum continues its swing back and forth.

[southbiochem]

I never understood this concept.

Has Russia ever enacted sanctions on the USA? If so, I have never heard of it.

I did not realized that the USA exported anything to Russia, much less anything that the USA does would affect Russia.

The idea is to hamper Russian economy, make investors flee it and politically isolate the country (granted, they do a good job at that themselves)

No, the US has not a big commercial relationship with Russia, but Europe basically lives off Russian gas and oil. This is critical as to why the EU has not gone along on the more hardcore side against Russia.

I believe the next step is to tighten commercial relationships bewteen Europe and US so that Europe comes to import US energy resources rather than Russia's. If they can pull that off, Russia can definitely go down.

But.....China needs to at least be friendly towards US/EU actions against Russia otherwise it's a bit of a gamble.