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Russia – The End or a New Beginning?

 3 min read / 

Will the EU and US sanctions cause the growth of the Russian market to halter and make it unappealing for  foreign investment or will it open up new opportunities for Russian entrepreneurs in Asia? One thing is clear – there is no way Russian economy will remain unaffected.

After the collapse of the Soviet Union and recently being one of the most promising BRIC countries, Russia has truly been appealing to the eye of foreign investors. Relatively low tax and high annual GDP growth facilitated the increase of interest in the 143.5million population economy. However, in light of the recent sanctions imposed by the EU and US, it is clear that the Russian economic boom might come to an end. The real question remains – should foreign investors continue their presence in Russia or should they rather start looking at other regions?

It is clear that sanctions targeting the finance and banking sectors will create difficulties for foreign investment and reduce the degree of confidence in the Russian market. For example, the Royal Bank of Scotland has restricted lending to Russian companies across the board, while Dutch bank ING is also looking to reduce its Russian loan book. Banks, especially those bailed out by the taxpayer and still battling to restore diminished reputations, are hesitant about lending to Russia, which not only has a direct impact on the financial sector, but also has the potential of damaging the oil market. For instance, Igor Sechin, the chairman of blacklisted, Kremlin-owned oil group Rosneft, has already asked the government to fund 1.5 trillion roubles (£25bn) to help the state-owned oil giant company refinance its debts. As the Russian newspaper Vedomosti first reported, Sechin proposed to raid the $90bn national well being fund, one of two rainy-day funds worth $190bn in total.

In addition, the new EU measures will also expand the number of Russian companies blocked from raising new money in the EU capital markets. As a result, the three state-controlled companies— OAO Gazpromneft, the oil unit of OAO Gazprom, the oil pipeline operator company OAOTransneft and the oil giant OAO Rosneft will be forbidden from raising funds of longer than 30 days‘ maturity, which directly decreases the number of potential investors from the EU.

Consequently, the sanctions might create long-term problems for Russia, a country so highly dependent on the energy market. Russia had big plans for oil exploration in the Arctic; however, with the new limitations imposed, Western companies are blocked from signing new contracts to provide services for deep-water oil exploration and production, Arctic oil exploration and production, as well as shale oil projects in Russia. Therefore, in order to improve the economic situation, the Russian Government will be looking for alternatives to the EU market and has already signed a 30-year agreement worth $400 billion with China to supply the People‘s Republic with Russian gas via a route through Siberia. But that pipeline is still years away from reality. Furthermore, it is questionable whether this could be a replacement for a gross $450 billion annual trade with the EU.

As a consequence, even though currently the Russian market might attract less foreign investment, it is unlikely that all international companies and funds will withdraw their assets from that region. The political situation could change any day, especially in light of the ‘fragile’ ceasefire and President Putin’s peace plan, which could drastically improve confidence in the stability of the Russian economy. However, for now the situation remains unsettled.

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