The EU's possible new sanctions on Russia: What 'burden sharing'?

As we noted in our previous blog on the potential 'Stage 3' of EU sanctions on Russia, the options considered by the European Commission and the EEAS seem heavily focused on financial markets, raising the question of whether London would have to shoulder too much of the burden.

The document notes:

Between 2004 and 2012, a total of USD 48.4 billion was raised through IPOs in the EU by companies incorporated in Russia. Out of those, USD 16.4 billion was issued by state-owned financial institutions.

In 2013, 47% of the bonds issued by Russian public financial institutions were issued in the EU's financial markets (€7.5bn out of a total of €15.8bn).

However, what the memo does not say is that all those deals took place in London - as data from the London Stock Exchange show quite clearly.

As the graph above shows, VTB (twice) and Sberbank have raised $16.4bn from IPOs (and follow on issuance) in London. This seems to correspond (or even outstrip) the figure cited in the EU document. Furthermore, the total value of IPOs from Russian firms also comes from London, since it stands at $48.96bn (between 2004 and 2012).

The spread of debt securities seems a bit wider, and data are harder to find. However, it is a good bet that quite a few were issued or at least cross-listed in London.

Ultimately, this is not 'make-or-break' for London. The fees from debt and/or equity issuance and stock listings are a nice income, but not huge in terms of the City. We would expect the figure to be within the hundreds of millions maximum. It's also worth remembering that any sanctions are likely to be only forward looking so relating to new debt and equity issuance not existing stocks (although this is still up for grabs in the negotiations). 

Hence, as we asked in our previous blog, the real question is why is so much of the burden (even if it is not a massive one) falling on the UK? France and Germany might be talking tougher, but they do not quite seem to be following through with actions.

*(Update: We have seen an updated version of the document which has the exact $16.4bn figure, and so have updated it in the text above). 

Leaked EU memo with options for 'Stage 3' sanctions on Russia highlights underlying confusion

France's Mistral warships seem to be off the table

As Greek daily To Vima and the FT have been reporting, there is a draft going around of the EU options paper on possible further sanctions on Russia that will be discussed at today’s meeting of EU ambassadors. The paper includes potential options for 'Stage 3' sanctions, and the key ones are:

1. Restrictions on access to EU capital markets for Russian state-owned financial institutions
2. Embargo on trade in arms
3. Restrictions on exports of dual use goods
4. Restrictions on exports of sensitive technologies including in the field of energy

We have seen a version of the document, and these are our initial thoughts:

• The section on capital markets is by far the most detailed. This raises the question of whether the UK would be taking a larger share of the burden. This is possible, and the document does not provide national estimates in terms of costs. However, as we have pointed out many times, the links between the City of London and Russia are not as huge as is made out. The draft paper stresses that financial links come from around the EU, seemingly confirming this analysis.

• Reuters notes that the four largest Russian banks with state ownership of over 50% are Sberbank, VTB, the Russian Agriculture Bank and VEB. The first two are listed on the London Stock Exchange. It is not clear what these sanctions would mean for companies such as Gazprombank, which is 100% owned by Gazprom - which in turn is 50% owned by the Russian state.

• That said, one has to question the level of burden-sharing taking place under these proposals. It seems France would put up almost nothing, as it could achieve a specific carve-out to guarantee that previously agreed arms deals – such as its €1.2 billion Mistral warship sale – are exempted.

• Once all the caveats are considered, the arms embargo seems essentially pointless. It would also have little impact on Russia since it imports barely any EU arms.

• The impact of all this on Russia would be mixed. The financial sanctions could have some impact but it would likely be a drawn out one. They would force companies to shift to much shorter financing and force the state to back them up even further – a blow but not a killer one.

• Linked to all this is the issue of international cooperation. For example, refinancing the €7.5 billion of bonds issued (in 2013) by Russian state-owned banks on EU markets would not be prohibitively difficult if markets in Singapore and Hong Kong are still open to these firms. Similarly, in terms of high tech imports, there may be alternatives on offer. At least on this front, Japan, South Korea and others are unlikely to turn against the West. Of course, the role of China is important. Beijing may help Moscow out (particularly on the finance front), but probably not to the extent Russia is hoping. China is keen to keep its holdings and investments diversified, and also has a lot invested in Russia.

• The fact that all of the sanctions are only forward-looking is also a big caveat, and allows both sides time to diversify away.

• Hence, the final question to ask is whether this document will bolster the threat of EU sanctions. In some areas yes, in others no. For example, the detail on financial sanctions will be welcome, although it is unlikely that Putin will be shaking in his boots. On the arms, tech and dual use side, though, the lack of clarity and the number of caveats could actually undermine the EU’s position and would once again highlight how hard it would be to actually reach unanimity to move to 'Stage 3' sanctions.

The document is still being negotiated. We will update our blog as and when we hear of new developments.