In what has been the harshest Western response to Russia’s involvement in the Ukraine crisis, the EU today imposed broad – so called Level 3 – sanctions against Russia. The US is likely to follow suit shortly. Below are four things MNCs need to know about the implications of these sanctions:
1. Credit costs will increase considerably and lending will become more restricted.
The sanctions will restrict the ability of majority state-owned Russian banks to conduct long-term borrowing on European financial markets. Russia’s biggest banks – Sberbank and VTB – will both be affected, in addition to a host of smaller banks, including ones already targeted by US sanctions. Sberbank alone holds 29.0% of Russian banking sector assets and accounts for 50.0% of retail and 32.0% of commercial lending. Shut out of EU and (likely) US financial markets, these banks will see their funding costs increase considerably. In response, they are likely to reduce new lending to both businesses and consumers and increase interest rates. Importantly, however, these banks will be able to continue processing financial transactions in US dollars and euro.
2. Sanctions will have a considerable impact on investment.
Investment in Russia is already contracting – it decreased by close to 5.0% in Q1 2014. Faced with weaker demand, higher financing costs, and political uncertainty, businesses in Russia will be more likely to postpone investments and put long-term plans on hold until the situation stabilizes.
3. The Russian government may create operational problems for Western MNCs.
Russian government discussions about import substitution and re-orienting trade toward Asia have been going on since the annexation of Crimea earlier this year. The new sanctions give proponents of such ideas a strong argument for more aggressive measures to restrict Western MNCs from the market, particularly companies that sell to the government. MNCs should be prepared for a range of Russian government responses, from slightly more onerous inspections to the outright expropriation of foreign assets, although the latter is not highly likely.
4. Companies should have a plan in place that accounts for a deteriorating operating environment:
Most MNCs’s Russia plans built in 2013 or even early 2014 are likely no longer reflective of the reality on the ground. Companies need to reassess the regulatory, operational, and economic environment in which their business will be operating in the coming months and prepare their business accordingly. FSG clients can read suggested actions on building such a plan here.