European businesses (not so much the City) start feeling the pain of the squeeze on Russia

As we noted in our Battle of Londongrad briefing, while the exposure of the City of London to Russia has been overdone, there are plenty of other sizeable exposures in Europe which could have people worried with regards to the stand off with Russia. Well, in fact they are worrying people and dividing the EU, as we highlighted with our scale showing the divisions on pushing sanctions on Russia.

This week has seen a spate of businesses issuing warnings over potential losses in Russia. The WSJ has a good round up here, but the key ones are:

• Société Générale, one of the largest French banks, announced that it took a €525m write-down on its business in Russia. The loss reduced its first quarter profits by 13% and saw its stock price dip by a couple of percent (since recovered). As we noted, the exposure of French banks to Russia at $51bn is quite sizeable and could certainly cause problems if sanctions were expanded. The FT reports that the bank could face a €5.2bn loss if it was forced to write off its Russian investments.
• Danish brewer Carlsberg has also prepared for the impact as it cut its profit and sales forecast due to uncertainty in Russia, a market which accounts for 40% of its sales and profits. It also posted a 14% decline in first quarter net revenue in Eastern Europe because of the crisis.
• Even though issues for the financial services sector are conspicuously absent (consistent with our findings), other UK businesses were feeling the pinch, with UK based Imperial Tobacco saying that its sales in Russia have declined by 7% in the past six months and that it expects the figure for the entire year to be around 10%.
• More generally plenty of businesses are facing declining sales and preparing for potential losses on investments in Russia, from the world’s largest brewer Anheuser-Busch InBev and Unilever PLC to smaller tech companies hit by the US arms embargo.

Russian President Vladimir Putin’s comments last night, which suggest a quite significant softening in his position, will certainly ease this pain somewhat and provide some light at the end of the tunnel (assuming his position has actually softened, which is another whole discussion for a separate post). That said though, the outlook for the Russian economy whether broader sanctions become reality or not if far from pretty (graph below from IMF forecasts).

One way or another Russia seems unlikely to be the growth market in the next few years that it was before the financial crisis.

The Battle of Londongrad? What does the data actually say?

On Friday afternoon Open Europe released a new flash analysis looking at the links between the City and Russia.

Much has been written on this issue – see NYT, FT and Economist for background.

While there is anecdotal evidence in these articles about City links to Russia, they fail to delve deeper into the data and, importantly, lack any context as to what Russian business means to a city and financial services sector the size of London.

The summary of the piece argues:

“Claims that the City of London would suffer major losses in case of financial sanctions against Russia are overblown. While it is true that there are some sizeable Russian investments in London, and it is home to a disproportionate number of Russian oligarchs, these are far from critical to a global financial centre such as London. The stock of Russian international investments in London is sizeable at £27bn, but it only accounts for 0.5% of total European international assets invested in London.”

“For all the talk of the large number of financial services provided to Russia, these only amount to 1% of total UK exports of financial services, business services and insurance. This would suggest that accusations that the UK Government is blocking tougher sanctions over fear of losses to the City don’t match the facts.”

“Sanctions related to financial or capital markets, for example severing access to credit for state-owned enterprises or Russian banks, might be an effective strategy to exert more pressure on Russia (given its reliance on external financing). Such move would be far more damaging to Russia than the City of London – though it may involve some losses for the latter. This should not, and does not seem to be, a big concern for the UK government. In any case, if things get to this stage, other EU countries may suffer far greater losses than the UK through wider economic sanctions hitting, for example, gas supplies and exports.”

There are plenty of factors to consider when looking at sanctions. While the City is one of them, in the scheme of the broader European links to Russia it does not seem huge (compared to some economies complete energy reliance). Furthermore, given the size of the City as a global financial centre the links to Russia seem to fall far short of the critical billing they seem to have been given.