Russia Can Survive No More Than 1.5 Years of Western Sanctions, Say Experts

Russian authorities are playing their trump cards to avoid the backlash of Western sanctions, despite rumours indicating room for fresh European intervention.  

On Tuesday, European foreign policy chief Federica Mogherini said that new sanctions against Russia will be discussed by EU foreign ministers on November 17th. According to other officials, the new measures are not expected to be particularly significant, with some saying that a longer travel blacklist is the most likely measure. 

According to experts, the sanctions combined with falling oil prices are just starting to have an impact on the Russian economy. On Monday, the Russian central bank said it expects no growth in 2015.

“Russia can go on for another year, probably one year and a half. Then a collapse might become extremely likely. Russian banks are running into serious problems,” an expert working in the banking sector in Brussels commented to Natural Gas Europe. 

In other words, also without new sanctions, Russia might deal with its induced financial imbalances in 12-18 months.  

RUSSIAN STRATEGY 1 - BANKING 

Moscow is trying its best to live through the sanctions. Consistently, Russia’s Central Bank announced new measures on Tuesday.

“I hope that the series of steps taken by the Central Bank, including the most recent steps that were declared today, will normalise the situation, because it is our deep conviction that there are no fundamental factors or reasons for such imbalances in the national currency,” Russia’s President Vladimir Putin said to IMF Head Christine Lagarde on Tuesday.

Russian banks amassed about $192 billion in foreign debts and the plunging rouble is increasingly an hurdle. 

Yuri Shafranik, Chairman of the Board of the Union of Oil and Gas Producers of Russia, said in a recent conference in London that the fluctuation of the ruble is now the main problem for Russian oil and gas producers. Putin waded into the issue on Tuesday. 

“I am sure you know that recently our national currency, the ruble, has been subject to some speculative attacks. I hope that the series of steps taken by the Central Bank, including the most recent steps that were declared today, will normalise the situation, because it is our deep conviction that there are no fundamental factors or reasons for such imbalances in the national currency” Putin commented.  

According to the Russian president, the measure announced on Tuesday can help the national currency. The Russian central bank did indeed support the ruble, changing the exchange rate regime. 

‘Effective from 10 November 2014, the Bank of Russia abolished the exchange rate policy mechanism through cancelling the permissible range of the dual-currency basket ruble values (operational band) and regular interventions on and outside the borders of this band. However, the new approach of the Bank of Russia to operations in the domestic market does not provide for complete abandonment of foreign exchange interventions, which can be implemented in case of financial stability threats,’ reads a note released by the bank.  

The bank, headquartered at 12 Neglinnaya Street in Moscow, is becoming increasingly active in related fields. According to several reports, it is also stepping up its gold buying to absorb domestic gold production. 

RUSSIAN STRATEGY 2 - COOPERATION

After a deal clinched by Rosneft and CNPC on Monday, Russia and China also signed a Framework Agreement for gas supplies via the Western Route.

“Gazprom goes on boosting the cooperation with its Chinese partners. Power of Siberia, the world's largest project for gas supplies via the eastern route is well underway. Today the Framework Agreement has been signed for gas supplies via the western route. This legally binding document creates the necessary prerequisites for signing a gas purchase and sale agreement within this top-priority project,” Alexey Miller, Chairman of the Gazprom Management Committee, commented.  

All in all, though, Russian efforts are way more all-encompassing and far-reaching. China is not the only ally in its arm-wrestling with Washington and Brussels.

BELARUS AND KAZAKHSTAN 

Belarus and Kazakhstan are central players too. In May, Moscow signed a treaty with Minsk and Astana to foster integration, guaranteeing the free movement of goods, services, capital and work force.

Two weeks ago, Belarus supported the Russian oil and gas industry acquiring Russian assets for the first time in its history. Earlier this week, KazMunayGas, the largest Oil & Gas company in Kazakhstan, completed a dual tranche US$1.5 billion benchmark eurobond issuance.  

In this sense, it seems that Russia is getting support from its two allies, partly limiting the effects of sanctions.  

Nonetheless, its Achilles' heel remains the banking sector. While a strong cooperation with China, Belarus and Kazakhstan could help in the energy sector, the banking problems might bulk and inflate in the medium term. 

Minsk and Astana could look for opportunities to strengthen financial ties with Latin American countries, with possible positive externalities for Moscow, but the scope of this search remains limited. The point is that time is running out. As our source said: “One year and a half is not that much time.”  

Sergio Matalucci  

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci