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Russian sanctions: Which companies are feeling the pinch?

With the latest round of sanctions from the US against Russia due to come into force on August 22, the market seems to have had little reaction, but what could the future hold?

Russian sanctions
The US had censured trade with Russia since its annexation of Crimea in 2014

On Wednesday, August 8, the United States announced that it would be imposing fresh sanctions on Russia as a response to its use of the novichok nerve agent in the attempted murder of former Russian spy, Sergei Skripal, and his daughter Yulia in the UK.

The new sanctions, expected to come into force on 22 August, join a list of other restrictions imposed on Russia by the US since 2014 following its annexation of the Crimean Peninsula from Ukraine.

Yet with all this geopolitical upheaval between two global powers, the market reaction seems to be relatively subdued.

This may be a result of the ‘business as usual” mentality that sees the sanctions as a continuation of the restrictions from 2014; however, there are other economic and political factors in play that could also be allowing the market to shrug off what might otherwise be viewed as ominous news.

Energy, Money, and Oligarchs

Before the latest censure, the 2014 sanctions mostly targeted top Russian energy companies and the inner circle of President Vladimir Putin, with state-owned oil & gas giants Rosneft and Gazprom in the crosshairs alongside financial behemoths Sberbank and VTB Group.

Individuals targeted by the sanctions, which include travel restrictions and asset freezes, included Russian billionaires such as Oleg Deripaska, an aluminium magnate, and Viktor Vekselberg, owner of Russian conglomerate Renova Group.

Deripaska also suffered in his capacity as chief executive of Rusal, the second largest aluminium company in the world, which was limited in its access to the US$140bn global aluminium market in a round of sanctions imposed in April.

Putin’s political allies, including former chief of staff Sergei Ivanov and former deputy prime minister Dmitry Rogozin, were also censured through the Specially Designated Nationals list, a record of people, organisations, and vessels with whom US citizens and residents are prohibited from doing business.

The sanctions announced this month are of a different hue altogether to what went before as they target exports to Russia of sensitive technology such as gas turbine engines, electronics, integrated circuits and calibration equipment used in avionics.  

What could the retaliation be?

While the Russians are unlikely to take this latest round of sanctions lying down, there may be restrictions on what form the response could realistically take.

“I don’t really see a round of counter-sanctions as being likely to be implemented by Russia,” said James Nixey, Head of the Russia and Eurasia Programme at Chatham House.

“What I do think is that it will further entrench the gulf between us … the Russian/Western fallout, particularly in regard to the US.”

However, he adds that the Russians may wish to maintain reasonable relations with the US as the country is fast running out of friends. “On the one hand they’ll want to tackle America, but on the other hand they won’t want to alienate their ally in Trump … they [the Russians], will hope that Trump can do something to ameliorate the situation to Russia’s advantage,” Nixey added.

It’s a similar story regarding the economic impact, with the Russia expert saying there could be a “shadow effect” beyond businesses that are already invested in the local market.

“It’s not just about the companies that are already [there] and exposed, it’s the ones who are thinking about going in and are definitely not going to now,” Nixey said. This will inevitably have an impact of foreign direct investment, the lifeblood of a truly international economy.

Feeling the Pinch

Post-communism, Russia’s economic transformation has been funded by its vast oil and gas resources, which initially at least was bankrolled by Western capitalism.

In fact, many of the high rollers of the industry remain heavily invested in the country – and by extension are probably still feeling the pinch from the last sanctions round.

BP PLC (LON:BP.), for example, currently owns around 20% of Russian natural resources giant Rosneft, worth around £11bn, so is particularly susceptible to issues related to Russian oil exports.

Another FTSE 100 oiler, Royal Dutch Shell PLC (LON:RDSA), is also affected. It holds a 27.5% interest in the Sakhalin-2 oil and gas project, as well as a 50% stake in the Salym fields project in Western Siberia, where it was forced to suspend oil exploration activities following EU and US sanctions in 2014.

The other key industry with exposure to Russia is the mining sector, with metals accounting for around 10% of exports.

However, according to Paul Renken, senior geologist and mining analyst at VSA Capital, it is not the trade restrictions or the sanctions that cause the most worry in the metals markets, but rather the volatility of the Russian rouble against the US dollar when they are implemented.

The concern around the currency is well founded, with the rouble having fallen 5% against the dollar since the prospect of further censure was raised earlier this month, and 45% since the first round of US sanctions were introduced four years ago.

A key example of this is FTSE 250 miner Polymetal International PLC (LON:POLY), who said in its results on 21 August that the Dollar/Rouble exchange rate has a “significant effect” on the operating costs of its projects, which are located in Russia, Kazakhstan, and Armenia.

Away from the natural resources sector, another UK firm feeling the squeeze will be exhibitions and conference organiser ITE Group PLC (LON:ITE), which has a 20% share of the Russian exhibition market.

In recent months, ITE seems to be trying to reduce its reliance on the Russian market through the acquisition of non-Russian focused marketing businesses such as Ascential Events which it purchased in July from FTSE 250 media group Ascential PLC (LON:ASCL) for £300mln.

How are investors and companies responding?

According to some analysts, the sanctions will be received with fairly little reaction in certain sectors, mainly due to the much longer-term perspective of their investments.

Simon Gardner-Bond, mining analyst at City broker Peel Hunt, says that while investors may be reluctant to put more money into Russian mining projects at the moment, companies with established interests won’t be considering the sanctions as a long-term issue.

Gardner-Bond says that most mining projects are often long processes, with many developments taking years before reaching production, so to some companies, the sanctions will be seen more as a temporary blip in a much longer process.

However, he says a more indirect consequence of the sanctions is not diverting investment from Russia but rather a knock-on effect on investment across the entire sector due to the volatility in commodity prices.

The only UK-listed companies that may suffer from the sanctions, Gardner-Bond says, are those with assets located solely in Russia or its sphere of influence, such as KAZ Minerals PLC (LON:KAZ) which operates in Kazakhstan, and Petropavlovsk PLC (LON:POG), a gold mining company with operations in the far east of the country.

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