Why US and EU sanctions on Russia are having a boomerang effect
Investor must-know: Russia retaliates against Western sanctions (Part 1 of 3)
U.S. sanctions on Russia
In our earlier series, Must-know: Will the Russian economy crash like the Boeing 777? , we discussed the impact of the latest round of sanctions by the U.S. and the European Union (or EU) on Russia for continuing to support pro-Russian separatists in Ukraine.
The U.S. has imposed sanctions primarily targeting Russia’s economy and the flow of investments into Russia. These sanctions have mainly been issued against companies in Russia’s defense industry and energy industry, as well as important Russian banks and individuals.
EU sanctions against Russia
The EU followed suit and issued its round of sanctions against 15 officials and 18 organizations in Russia. The EU sanctions subject these officials and businesses to asset freezes and visa bans.
Some of the key companies facing these sanctions include two of Russia’s major energy companies, Novatek (NOVKY) and Rosneft (OJSCY). The sanctions could also affect major business deals between these kinds of companies and U.S. companies like Morgan Stanley (MS) and Exxon Mobil (XOM).
We also discussed Germany’s sensitivity to the sanctions against Russia. Russia is a large market for Germany’s export-driven economy. The future of Russia-U.S. relations seems to be heading towards another Cold War.
A flight of funds from Russia
The investment climate in Russia has already been hit amid increased risk. The International Monetary Fund (or IMF) has forecasted that the flight of funds from Russia this year will amount to ~$100 billion.
A large number of U.S. investors who invest in Russia through exchange-traded funds (or ETFs) like the Market Vectors Russia ETF (RSX) are re-assessing their holdings. RSX, with 85% of its portfolio invested in Russia, has already taken a hit of 13.41% (as of August 6) since the U.S. announced additional sanctions against Russia on July 16.
Sanctions have a boomerang effect
Russia’s President Vladimir Putin, on July 17, warned the U.S. that sanctions usually have a boomerang effect. “As for sanctions, they usually have a boomerang effect, and without a doubt will force US-Russian relations into a corner,” he said. “This is a serious blow to our relationship. And it undermines the long term security interests of the US nation and its people.”
Consequently, on Thursday, August 7, Russia came out with its list of sanctions against countries that have imposed sanctions on its key businesses and personnel.
Find out more about Russia’s sanctions against the U.S. and EU in the next part of this series.
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