Russian sanctions start to bite as growth forecasts are downgraded

Six months after the confrontation over Ukraine first blew up, the damage is starting to be counted in dollars, euros and roubles. And as Russian foreign minister Sergei Lavrov met his counterparts from Ukraine, Germany and France, he will have been aware that it is Russia that has most to lose from a protracted economic stand-off with the west.

The effects of successive rounds of sanctions on the Russian economy are starting to trickle down, even if there are loopholes and exceptions aplenty in the measures. Foreign banks have tightened credit for all Russian companies, even those not featured on any government's blacklist. Retail prices are rising on the back of Russia's retaliatory ban on European foodstuffs. Growth is anaemic, the business elite twitchy.

The Royal Bank of Scotland, which is 81% owned by the British taxpayer, has restricted lending to Russian companies across the board, while Dutch bank ING is also looking to reduce its Russian loan book. Banks, especially those bailed out by the taxpayer and still battling to restore tarnished reputations, are nervous about lending to Russia, although oil companies don't share those qualms about doing business in Moscow.

As a result, not a single US dollar, euro or Swiss franc was lent to a Russian company in July, according to Bloomberg research, the first time since the depths of the financial crisis that Russian companies have faced such a credit drought.

"We are starting to finally see some impact on sanctions, not because any of any of the official sanctions, but because of the accumulation of self sanctions," says Chris Weafer of the Moscow-based Macro Advisory. "That is starting to have an impact on lending, interest rates and slowing down the economy and you have the additional problem of food inflation. It is all begining to weigh."

For now, although Russia's state-owned banks have been banned from raising funds on Wall Street, the City of London and other western capital markets, they are not total economic outlaws. Timothy Ash, head of emerging market research at Standard Bank, said if the west was really serious it would have banned trading of Russian bank debt on secondary markets, closing a loophole that allows Russian bank debt to remain a valid asset.

Ash thinks sanctions will weigh on the Russian economy, without causing imminent panic. "Are you going to see a financial crisis in the short-term? Probably not on the back of this. Does the west have the capability to do that? Absolutely. Do they want to? Clearly not."

But the tightening of credit cascades around the economy like falling dominoes: big Russian companies, sensing reluctance from western creditors, turn to Russian banks for loans. They in turn go to the central bank, which reacts by raising interest rates.

Higher interest rates help prop up the rouble, but make it more expensive to pay off debts, so Russian consumers begin to rein in spending. Car sales were down 23% on last July, meaning fewer of the gas-guzzling 4x4 vehicles beloved by some Russian motorists are being driven off the forecourts.

Just as credit is becoming more expensive, Russian shoppers face higher grocery bills, after Vladimir Putin banned food imports in retaliation against western sanctions. Although pictures of empty shelves once laden with Parmesan and Brie are doing the rounds on Russian social media, there are no 1980s-style shortages. But most economists – and the Russian government – expect food prices to rise, a setback for Russia's long-running struggle to tame inflation.

Government officials are already beginning to see the writing on the wall. Igor Sechin, the chairman of blacklisted, Kremlin-owned oil group Rosneft, has asked the government to dole out 1.5 trillion roubles (£25bn) to help the state-owned oil giant company refinance its debts. As the Russian newspaper Vedomosti first reported, Sechin proposed to raid the $90bn national wellbeing fund, one of two rainy-day funds worth $190bn in total.

While other state firms are expected to join the queue for a share of the state's cash pile, economists have been downgrading their growth forecasts.

The International Monetary Fund, which has said Russia is already in recession, expects Russia to grow by 0.2% this year. This is actually worse than it sounds. Russia is still a developing economy, with 18 million people below the poverty line (13% of the population). Putin, who is looking to run for president in 2018, wants Russia to grow like China, with its 7.5% growth rate, not France, which is flatlining.

"With growth of 1% or less than 1% [in a developing economy] you might as well be in recession," says Weafer. "There is no question about it. Russia is facing a difficult winter."


/The Guardian/