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New round of EU sanctions on Russia

Non-Oil and Gas
 

The downing of a civilian aircraft in eastern Ukraine prompted a major shift in EU policy on sanctions.

The USA and the European Union introduced in late July a new round of sanctions against Russia, marking a significant escalation from the previous measures gradually brought in between March and June. While the EU had previously been maintaining a more balanced and cautious approach due to concerns about jeopardizing its economy, the downing of a civilian aircraft in eastern Ukraine in mid-July prompted a major shift in the EU’s foreign policy as its members reached a tougher consensus against Russia and narrowed their differences with the US stance. Although US sanctions alone would likely weigh also on European businesses dealing with targeted companies, we believe the new EU restrictive measures will serve nonetheless as a political signal that will further dampen confidence in the Russia economy.

The new EU sanctions include an embargo on arms and defence goods, while also banning Russian state-owned banks from selling new equity, debt or other financial instruments with maturity exceeding 90 days in the European capital markets.

Most importantly for the Russian energy sector, the measures will restrict technology transfer necessary for the development of shale, deep-water and Arctic resources. EU sanctions now more closely match similar measures by the US, which however also restricts medium and long-term financing to Rosneft and Novatek.

The latest sanctions could have significant impact on the Russian economy and financial sector.  

We believe recent sanctions and expectations of further restrictive measures will heighten business uncertainty, increase the cost of capital and limit investments in Russia. In addition, the Central Bank’s tighter monetary stance (with interest-rates up 350bps since March), which seeks to mitigate the effects of a severe capital flight on the exchange rate and inflation, will further hamper domestic economic activity, increasing risks of a recession this year.

 

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