Keeping U.S. financial sanctions enforced for an indefinite period could slow down Russia’s efforts to rebuild its economy.

The legislation draft aimed against Russia and endorsed by the U.S. Senate on June 15 was promoted at Capitol Hill so rapidly that very few managed to grasp the meaning of what kind of sanctions the U.S. legislators intended to introduce and how much it would impact our economy.

Let’s try to sort it out.

Sanctions aren’t going anywhere anytime soon.

The draft of legislation providing for new sanctions is actually not about Russia.  It is devoted to Iran and the measures directed against Russia have been added as a separate set of special amendments.  These amendments have mostly no new provisions and basically repeat the language of the bill introduced by a group of senators back in January, when everybody expected that President Trump would cancel President Obama’s executive orders on Russia.  The main purpose of most these new bills is to raise the legal status of these orders and de facto force President Trump to clear with any steps aimed to cancel or soften these sanctions with Congress.

Judging by the way these amendments were endorsed (98 “ayes” with only two “nays”) one can definitely assume that if/once the bill is approved, Obama’s sanctions introduced against Russia will stick around for a while.  Though during his last annual special television program and a Q&A show “Direct Line,” President Putin claimed, and many Russian experts repeated, that the sanctions had a very limited impact on the Russian economy, in reality the economic meltdown Russia went through in the recent years was mostly caused by these sanctions — not by the drop of the oil prices.  In 2008, the oil prices went down even more dramatically but there was not such a steep fall of the ruble and no corresponding decrease of income and of purchase power among Russians.

The Inflicted Damage

Why is the situation so different now?  By July 1, 2014 (before the Malaysian Boeing was shot down over Donbas and the harshest sanctions were slapped on Russia), Russian banks and corporations had managed to collect a record-high amount of foreign loans ($660 bln.).  This was, in fact, the source of funding for  flimsy recovery after the 2008-2009 crisis, since for the last 25 years our own financial system had never learned how to generate big money (the average term of attracted deposits is about one year, while the overwhelming majority of deposits in banks last for a period of up to one year).

Russians could only get such a large amount of money from abroad.  However, in the mid 2014, after the financial sanctions were introduced, Russia essentially ended up in an international credit blockade: securing a foreign loan for our companies and banks became an insurmountable challenge (and not only for those which were included on the sanctions lists: many creditors became extremely cautious with any Russian borrowers for “just in case.”)  Meanwhile, the old loans were still due to be paid back, though refinancing was no longer possible.  The hopes placed on China were false: the scale of the Chinese financial system can not be compared to that of the West (its combined assets are four times smaller than those of the United States, and three times smaller than those of the E.U.), and besides, Chinese banks are quite reluctant to work with foreign creditors and would rather loan money to domestic producers (in Russia’s case, the Chinese gave credits only to Russian oil/natural gas projects, which were expected to supply hydrocarbons to China.)

As a result, Russian banks and companies’ total portfolio of external loans decreased from $660 bln. by mid-2014 to approximately $460-470 bln. recently, while Russians are mostly still deprived of the option to borrow money from Western financial markets.  It has hurt the people a lot, since, by the end of 2014, the value of the ruble was dramatically depreciated.  I would dare to assume that the drop in oil prices made a significantly lesser impact since their fall was balanced by the Reserve Fund’s expenses and by the sharp decrease of imports.  However, there was nothing available to compensate the shrinking of the credits by $200 bln.  This is why the Kremlin would be eager to see these sanctions to be removed in the first place.

But now the outlook for their removal looks quite bleak with the Russian intervention into the U.S. domestic affairs’ investigation is gaining pace (which actually triggered the new bill) and President Trump could find any attempt to soften the sanctions challenging, even though he and Putin might become best pals at the July G-20 Summit, and the latter would allow the U.S. President another look into his soul.  It is not clear yet whether Trump is going to sign the new legislation since Secretary of State Tillerson has unambiguously stated that the President would rather prefer “the flexibility… to maintain a constructive dialogue.”  Whatever happens, President Trump wouldn’t be able to use the veto power, since Congress would easily override it, while a new wave of accusations of being too sympathetic to Russia is not going to make the President’s life any easier.

Additional steps

The bill does not introduce any new implicit sanctions, although it has a couple provisions that could imply the possibility of new sanctions:

• reducing the lengths of available Western credits to 14 days;
•  introduction of sanctions against third countries’ oil/gas companies working with Russia;
• and possible new sanctions against the new export pipelines (the U.S. senators clearly intend to block the Nord Stream-2 Project.)

However, any of these new steps could not be introduced directly by Congress, since it would require Presidential or Treasury endorsement, who may or may not approve it; and none of these new sanctions would have an additional negative impact on the Russian economy. Russia would actually gain from blocking the Nord Stream-2 since it would be an extremely expensive project, and part of its burden would be placed directly or indirectly on the Russian taxpayers’ shoulders (for instance, by relieving Gazprom from paying part of the dividends to the budget, as Putin suggested in May).  It would be implemented in the situation of a surplus of export gas pipeline capacities just for the sake of obviating Ukraine, hence punishing the latter.

Gazprom European partners have already exerted pressure on their lobbyists in the governments to counteract U.S. sanctions against Nord Stream-2. The “usual suspects” know for their cozy feelings toward the Gazprom projects German Vice-Chancellor Gabriel and Austrian Chancellor Kern have already made relevant statements.  But even the European heavyweights Angela Merkel of Germany and Emmanuel Macron of France do not seem to be eager to get involved in the conflict, preferring instead to let Gazprom and its partners to sort it out the issue with U.S. on their own.  The incessant lobbyist pressure of Gazprom’s German partners is a longstanding source of a headache for Merkel, and it would be quite convenient for her to shift the onus for dealing with this issue onto U.S. senators.

As for Russia, the extension of U.S. financial sanctions for an indefinite period is going to be a serious challenge, which could dramatically slow down the rebuilding of the Russian economy.  Russians will no longer be able to borrow at will from international markets, like they use to do in 2010-2014, when corporate external debt grew from $360 bln. to $660 bln.

This article first appeared at the RBC site.