The threat of Ukrainian sanctions against Russia to both sides

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2014/08/11 • Politics

The Ukrainian sanctions package against Moscow will be broader than the European and American ones.

Ukraine is imposing sanctions on people and companies that have to do with the Russian Federation. Last week the Cabinet of Ministers approved a bill that prescribes the possibility of employing 26 types of restrictive measures in regard to such subjects – in particular, the restriction of business activity on Ukrainian territory, the freezing of assets, a ban on privatization, usage of radio frequencies etc.

The draft document will be reviewed today in committees, and tomorrow, on August 12, it could be approved by the Parliament. “This is the first time in Ukrainian history when we, as a state, are using sanctions against foreign subjects that are committing crimes against our state,” said Ukrainian Prime Minister Arseniy Yatseniuk.

The sanctions will be imposed on 172 individuals and 65 legal entities, for the most part those founded by Russian citizens and organizations. They are imposed based on a decision by the NSDC at the initiative of the President, the Cabinet of Ministers, the SSU and the National Bank. As of Friday, the list of such companies and persons was unavailable. “I think it would be smart to repeat the same persons listed by the EU and the US, in order for these sanctions to form a system with all sides. Such a decision is self-explanatory,” notes Viktor Chumak, chairman of the Verkhovna Rada committee for fighting organized crime and corruption. “In general the companies and surnames coincide with the EU and US lists,” confirms Mykhailo Holovko, deputy head of the Verkhovna Rada Committee for Economic Policy.

Oleh Malskiy, Astapov Attorneys partner, reminds that the list of persons subject to EU and US sanctions is already available to the public, and they are much shorter than the numbers presumed for Ukrainian sanctions. “Accordingly, it can be predicted that these lists are not a copy, and Ukraine intends to impose sanctions on a broader circle of individuals and companies than the EU and US,” he explains.

The broadening of the Ukrainian list happened due to the inclusion of companies cooperating in the defense sphere. “We are cooperating with a much bigger number of Russian companies, to which we supply both spare parts and technologies. Here our list might be broader,” emphasizes Chumak.

Especially dangerous

Third-level sanctions first and foremost touched on the Russian finance sector. Sberbank, VTB, Gazprombank, VEB and Rosselkhozbank were all subject to limitations on part of the EU. The NBU has a joint vote in this issue, however the institution is not in a hurry to vote for the moratorium on Russian bank activity in Ukraine. The significant volume of Russian capital in the Ukrainian banking system, 32%, is what makes them weigh all the consequences of imposing the limitations.

Bank assets that have Russian origin occupy 18% of the banking system. What is more, these financial institutions continue to be solvent. “Deposit withdrawals in Russian banks have been twice as high as that in the other institutions. But Russian-origin banks did not take a penny of refinancing from the NBU. Their parent structures gave enough financing,” concludes chairman of the Ukrainian National Bank Valeriya Hontareva. “All banks with state assets handed over significant refinancing lines to Ukraine, and the banks use these funds, through currency exchange or swaps, to pay their investors.”

Hontareva reminds that “clients, credits and liabilities” of Russian banks in Ukraine are Ukrainian. “We increased monitoring of banks with Russian state capital. Sanctions are not imposed at the NBU level, however we gave our recommendations for work with such institutions,” said Valeriya Hontareva, making it clear that the NBU so far is not ready to recommend a ban on work of Russian banks just because of their registration location.

“The trouble is that Russian banks departments only have Russian names and funds in Russia. But they are legal entities that are legitimate in Ukraine, and they pay taxes in Ukraine,” Viktor Chumak agrees with her. “We should see how significant the stress on the Ukrainian banking sector will be.”

As to the other sectors, where the sanctions might turn out to be less detrimental to the Ukrainian side, the state officials are being more radical. “As to Luhanskteplovoz, the means might even amount to confiscation,” explains Viktor Chumak.

According to Russian publication Kommersant, restrictive measures will also touch on oil and gas equipment supplies (pipes, pumps and compressor equipment).

The ban on radio frequency usage noted in the sanctions list puts the work of Russian telecommunications operators in jeopardy. “Mobile operators activity has to be reexamined,” Mykhailo Holovko is convinced. “If this [the suspension of activity] does not interfere with the country’s telecommunication options, we should do it,” Chumak emphasizes. “It would be logical, as mobile operators have access to customer databases. They include locations, control of communication via calls and text.”

Oleh Malskiy, mentioning that at the current stage it is quite difficult to interpret real consequences for various business sectors, admits that after a formal reading of the existing text of the bill, one may conclude that the ban on Russian telecom operators in Ukraine is probable. “We cannot forego the instances when there may be additional recommendations or additional explanations. We may assume that it will be necessary to plan out the technical aspects of preserving (maintaining) communication infrastructure on Ukrainian territory, as switching off communication services will not only touch on the company’s interests but communication needs of Ukrainian customers,” says the attorney.

Imposition of sanctions is not always a death sentence. Sometimes it is only the beginning of the struggle. According to the law, every person/company has the right to demand an exemption from the list. In particular, such processes were initiated by a number of Ukrainian officials, former government representatives, and Ukrainian businessmen. “There have been instances in European practice when such actions provided a result and it was possible to exclude a company (a person) from similar sanctions lists. But the appeal procedure is quite difficult where a wide range of factors should be noted. However, it is theoretically possible,” Oleh Malskiy is convinced.

Sanctions. Expensive

Arseniy Yatseniuk evaluated Ukraine’s losses from implementing the sanctions for the Ukrainian side and “aggressive Kremlin policies” at $7 billion. According to expert opinion, the real number, taking into account broken cooperation, physical destruction of businesses in Donbas, macro economic tendencies, is much higher. “$7 billion is not a complete evaluation of the country’s losses. GDP production rate losses will be about twice as high (a decrease of no less than 7% is expected in 2014),” says former representative of the Ukrainian government in the Eurasian economics committee Viktor Suslov. “Ukrainian citizens will lose even more because of hryvnia devaluation of over 50% and partial loss of their savings, as well as the resulting inflation and price hike (inflation prognoses for 2014 are no less than 17%).”

The war in Donbas will have its own, separate bill to pay – ruined bridges and roads, railways, blown up productions and apartment blocks will have to be restored. “Human losses cannot be expressed in money, but compensations to the families of those fallen in the ATO, treatment for thousands of wounded and disabled, compensation of losses of military equipment, used-up ammunition and military materials will require additional billions,” notes Suslov.

Meanwhile Ukraine is in a worse position than Russia or the EU, as it is suffering the loss twice. “Sanctions against the EU always influence the Ukrainian economy indirectly,” says Oleh Malskiy. The Ukrainian side is counting on the Ukrainian business to be able to compensate the losses in the mid-term perspective thanks to Belarus and CIS markets, as well as EU countries within the frameworks of the Association Agreement.

The countries that imposed economic sanctions against Russia were subject to response limitations – starting August 7, the Russian Federation imposed an embargo on import of food, meat, fish, cheese, milk, vegetable and fruit from countries that initiated the sanctions. The losses of EU countries are calculated at $9-12 billion.

Do Ukrainian sanctions against Moscow constitute a total ban on food supplies to Russia, as was the case with the EU and the US? Experts emphasize – the probability is high, but the limitations will not be imposed automatically. “In this case it is very difficult to say for sure whether one action is the result of another, as, taking into account the tense situation, such a probability cannot be totally disregarded. On the other hand, formally such actions are independent (therefore the actions of one side are de-facto not the result of the actions of another),” says Oleh Malskiy.

Viktor Chumak has no doubt that Russia will respond to Ukrainian sanctions with even harsher limitations. “But we are already used to this. Besides, the main sanction has been imposed on us already – the refusal to supply gas,” he reminds.

Economic sanctions the US, EU and Ukraine are imposing on Russia, and Russia’s return sanctions in regard to these countries generate huge mutual damage. “All the participants lose when they refuse to maintain trade relations. Meanwhile countries with weak, non-competitive economies, such as Ukraine, lose more, and end up in a worse situation. Loss of foreign markets for such countries cannot be practically compensated,” concludes Viktor Suslov. If the trade wars continue, the economic position of Ukraine, which has also become the arena for direct geopolitical squabble between the West and Russia, will most likely be catastrophic, he fears.

According to economists, the conflict has already broken out of the “Russia-Ukraine” paradigm, and now threatens to ruin the bases of world industries and international trade. “The future of the World Trade Organization is questionable. The roles of the IMF and the World back will become less significant. Of course, the role that the UN and UN Security Council play in solving international conflicts is decreasing as well,” Suslov enumerates. “Availability of nuclear weaponry and military power become the final argument.” There is also a tendency of increased importance of the global and regional economic and military-political unions: a good example of this is BRICS.  Suslov is convinced that “the world is no longer uni-polar, but the multi-polarity that is being born, the conflict between big nuclear states and geopolitical unions, make our world more unpredictable and more dangerous”.

Source: Forbes

Translated by Mariya Shcherbinina

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