After Ukrainian situation burst out in November 2013, nobody thought that might have such serious consequences for Ukraine, Russia and the EU. Economic sanctions introduced by a number of countries including the USA, the EU, Canada, Switzerland, Japan, Australia etc in summer 2014 limited international capital and debt raising opportunities for Russian banks and corporates, slightly affecting trade finance and even bank-to-bank transfers, especially those denominated in USD. Compliance is now the key word for each and every bank globally when it comes to anything related to Russia in their day-to-day business. In addition to restrictions on new Russian debt and equity, S&P and Fitch downgraded Russian sovereign ratings to below investment grade levels. On top of those factors, crude prices went down, decreasing inflows of hard currencies to the country.
The above weighed hard on Russian economy – 2014 GDP growth of 0.6% only, -2.5% in investments, inflation (CPI) went up to 11.4%, RUB depreciated almost 1.7 times to USD and EUR. Local interest rates hiked to 11-17% p.a., and those still capable of either borrowing abroad or doing trade finance noted increased rates and fees charged by their overseas counter-parties. Secondary market appetite for Russian risks dried out, and foreign lenders selectively stick to their customers’ business only most of times.
But was that really all gloom-and-doom, and what happens to Russia now?
Russian borrowers are still fully and timely repaying their international debts, including any trade related obligations. New business is limited but is offered at more lucrative terms, and new structures are in place to adapt the business to be compliant to sanctions regimes (e.g., financing Russian corporates against bank guarantees instead of funding those banks directly). The government and the Central Bank have developed a crisis plan to support key local companies and financial institutions in case they face difficulties in repaying their international borrowings.
I believe all those troubles on Russian horizon are a headwind, but not yet a tornado. If someone still remembers 1998, the situation was almost the same then, with the exception of political tensions with the West, and afterwards the country pushed for development. It was widely argued that Russia missed a chance to diversify the economy from being heavily dependent on oil and gas exports – probably this time is another chance to do something about that. Depreciation of RUB makes Russian non-oil exports even more competitive and the lack of hard currency coming into the country as investments and debt makes the Russian government to promote non-oil exports even harder these days. Drop in imports may further ease up the pressure on Russian FX reserves and we saw almost 40% decline in imports to Russia during 2014. It should be also mentioned that EU sanctions do not restrict financing of exports of non-sanctioned goods from EU countries to Russia – therefore there are still a good number of opportunities for trade and export finance.