Putin’s revenge
This is how the Kremlin is reacting to Western sanctions
By Charlotte Raskopf
03/12/2022, 4:11 p.m
Frozen oligarch assets, closed airspace, partial Swift ban: the West’s package of measures against Russia is unprecedented. The answer from Moscow is not long in coming. But who is really harmed by Putin’s countermeasures?
It didn’t take long for the Russian government to announce its retaliation for Western sanctions. President Vladimir Putin even compared the sanctions against his country to a declaration of war.
Putin is under pressure: there are now more sanctions in force against Russia than against any other country in the world. The Western countries have put together an unprecedented package of measures: the assets of Russian oligarchs have been frozen, EU airspace has been closed to Russian planes, the Russian central bank has been sanctioned and the country has been partially excluded from the Swift international payments system.
Russia responded with counter-sanctions. Based on the experiences with the first sanctions exchange in 2014, surprising, asymmetrical reactions from the Kremlin are to be expected, writes Germany Trade and Invest.
Putin has already implemented numerous counter-sanctions. Most of the measures are designed to prevent too much foreign capital from flowing out.
An important building block are trade bans and sanctions for certain economic sectors, import and export of certain products was prohibited. For example, medical products that come from one of the countries that have imposed sanctions on Russia can no longer be exported. This is to prevent medicines from becoming scarce in Russia.
Russia restricts capital movements
In addition, there are capital controls intended to make it more difficult for foreign exchange to flow abroad. The Russian government has put numerous rules in place for this: Russian companies have to exchange 80 percent of their foreign exchange earnings for rubles. Foreign currency loans to foreign companies are prohibited, foreigners are no longer allowed to be paid dividends.
Private individuals may only transfer up to 5,000 US dollars per month abroad, for cash and other financial instruments in a foreign currency there is a limit of 10,000 US dollars.
The Russian government has also restricted capital transactions with certain countries in response to Western sanctions. A list of countries that Russia describes as “unfriendly states” is affected. This refers to the countries that have imposed sanctions on Russia.
Transfers to these countries are initially suspended until the end of March, Russia only pays to the countries concerned in rubles. If you want to do business from Russia with people or companies from these countries, you need a special permit.
In addition, Russia has closed its airspace for 36 countries (including Germany) and suspended cooperation in space travel.
Further sanctions possible
However, the fear of further measures, which the Russian government is explicitly keeping open as an option, weighs much more heavily than Russia’s counter-sanctions.
On the one hand there are the gas deliveries. The debate as to whether Germany and the EU should decide on an embargo on Russian gas and oil themselves has long been in full swing. The US went ahead on Tuesday and imposed an embargo on Russian oil, and Britain also no longer wants to import oil from Russia.
But Russia could also impose an export ban and thus forestall an embargo. In a speech broadcast on Russian state television on March 7, Russian Energy Minister Alexander Novak said Russia had “full rights to reverse sanctions and impose an embargo on gas transit through the Nord Stream 1 pipeline.” This decision has not yet been made, he said: “No one wins.”
Such an embargo would undoubtedly affect Germany: Last year, 55 percent of the gas imported came from Russia. But for Russia this would dry up an important source of income.
Foreign companies in distress
Things could also get tight for foreign companies doing business in Russia. Since Putin’s attack on Ukraine, numerous international companies have withdrawn from the country. The oil company Shell announced that it would end its partnership with the Russian state-owned company Gazprom, Adidas stopped its partnership with the Russian Football Association, the auditor KPMG is selling off its Russian business altogether, and BMW will no longer build cars in Russia for the time being.
The problem: If foreign companies stop their activities in Russia, for example close their local production, they could be expropriated. Because such a closure could be treated by the Russian state as willful bankruptcy, which is punishable by law.
Russian politicians are openly threatening this option: the general secretary of the governing party, Andrei Turchak, has called for the Russian subsidiaries of Western companies to be nationalized if they stop doing business in the country. Deputy Prime Minister Andrei Beloussov spoke out in favor of accelerated insolvency proceedings for the companies concerned. By appointing an insolvency administrator, companies could be expropriated indirectly. Or, according to Beloussow, foreign companies could transfer their plants in Russia to their own Russian companies or hand them over to Russian partners.
The uncertainty about how things will continue for Western companies in Russia is also affecting the banks. Many now even calculate the possibility of a total failure. In a press release, the French Société Générale, which holds a majority stake in the Russian Rosbank, explicitly mentions the risk that the bank’s ownership rights to Russian subsidiaries will be withdrawn. But that is manageable for the bank.
Russia would suffer more from a decoupling
Despite all the counter-sanctions and the associated uncertainties, the question remains who is being harmed by Putin more: the West or Russia itself?
One thing is clear: Russia would probably suffer much more from a long-term decoupling of the trade relationship from the USA and its partners. This is the conclusion of a model calculation by the IfW Kiel and the Austrian Economic Research Institute (Wifo).
“Sanctions usually have a short-term economic effect, but no political effect. If they last a long time and are comprehensive, their potential for political impact can increase,” says Wifo Director Gabriel Felbermayr. “After an adjustment phase in world trade, Russia will be significantly weaker, but the damage to the Allies is manageable.”