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FEATURE: Wealth Managers Try To Measure How Deeply Russian Sanctions Will Bite

Stephen Little

21 August 2014

Following the recent sanctions imposed by the US and the European Union over the ongoing crisis in Ukraine, Russia has remained defiant, warning that these acts will backfire, causing further economic woes for Western nations.

The new measures, the toughest against the Kremlin since the height of the Cold War, aim to force Russia to change its stance over its alleged support of separatists in eastern Ukraine by targeting its financial, energy and arms sectors.

While the latest sanctions are expected to have limited short-term impact on Russia, in the long-term, the economy, which is already teetering on the brink of recession, is likely to feel the strain. Economists have also said that EU economic interests could be hit due to its close trading ties with Russia.

Chris Weafer, a partner at Moscow-based consultancy Macro-Advisory, warns that as a result of the sanctions, Russian high net worth individuals could permanently move their assets away from Europe, although the new measures would “not materially affect” the wealth management industry in total.

“We have already heard that Megafon, which is controlled by Russia’s richest person, Alisher Usmanov, has moved its cash to Hong Kong banks. This is a move I expect will be replicated by other companies and increasingly, by individuals. But even when sanctions risk ends, I expect to see much greater use of financial services and wealth management from Asia, Singapore and Hong Kong in particular,” said Weafer.

The latest sanctions signal a step up in resolve by the West and come following a deepening of the crisis in Ukraine since the downing of Malaysia Airlines flight MH17 in July.

As well as going after eight of Putin's top associates, the US has expanded its sanctions to include three banks, the Russian energy sector and defence companies.

Meanwhile, the new EU measures will restrict Russian state-owned banks from accessing European capital markets and companies will no longer be able to buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 90 days, as well hitting the energy sectors and the export of arms.

“There will likely be two effects,” said Weafer. “The sanctions threat should provide a boost to the development of domestic financial services and secondly, Russians are more likely to look to greater diversification in their wealth management,” he said.

Weafer said that Russian businesses, many of which are owned by high net worth individuals, would be hurt by the increased number of obstacles they faced in order to carry out business and trade with Europe.

“Even if the official sanctions are not hurting them specifically, many Western banks and trade companies have adopted a very cautious approach towards Russia risk and are on a voluntary basis stopping or restricting trade with Russian entities. That is also hurting profits and affecting the value of their business and net worth,” he said.

“As a group, the wealthy Russians who are not part of the political elite are very frustrated at the political events and sanctions impact. But they have no political voice and very little influence. They may not even complain too loudly inside Russia,” he added.


A number of successful challenges to EU sanctions over the past year have made the bloc wary of taking aggressive action against Russia. Only now has the EU matched the hard-hitting measures imposed by the US, following several rounds of mild sanctions.

“The stance of the EU has changed significantly in response to the downing of flight MH17 that was attributed to pro-Russian separatists in Ukraine. These sanctions are substantively different from the previous ones and are meant to hurt. It is important to note that the EU sanctions have moved a step up in targeting Sberbank, which the US sanctions have so far avoided,” said Nonna Crane, a senior associate at Chadbourne & Parke, a London-based international law firm which specialises in sanctions.

Earlier this year, German chancellor Angela Merkel said that legal considerations had played a significant role in the EU’s reluctance to match US measures.

“We in Europe are bound to having an obvious connection to Crimea – ie, the offence that is at the base of the sanctions,” said Merkel. “That’s a different legal situation from the US.”

This followed the case last year of Iran's Bank Mellat, which successfully got EU sanctions against it quashed and then sued the UK Treasury for $4 billion in compensation for alleged lost business (for an exclusive interview with Sarosh Zaiwalla, the lawyer who won the case for the bank, click here). Commentators on the crisis have suggested that because of this judgment, the EU has been wary of imposing stricter sanctions against Russia and as a result previous measures were largely cosmetic.

“The Bank Mellat ruling could be used by entities or individuals affected by sanctions as a precedent to challenge them. Whether we are going to see those targeted taking the same action remains to be seen. With time, depending on how long the sanctions last, we may see them challenged,” said Kevin Atkins, international partner at Chadbourne & Parke.

“In order to challenge the sanction, an entity or individual would have to demonstrate that there has been a substantive error in that the restriction imposed upon it is not proportionate or justifiable and there are a number of recent examples of successful challenges of this nature at the EU and UK level.  EU challenges would be made to the general court of the Council or the European Court of Justice whilst UK challenges would be made to the High Court, with the right of appeal up to the Supreme Court,” said Atkins.


Opinion on the effectiveness of sanctions is divided and many observers are sceptical that they will force Putin to reconsider his Ukraine strategy.

On the one hand, as Russian trade and investment are spread across multiple jurisdictions, it is therefore not dependent on one country and could see its way through the storm by expanding trade elsewhere.

However, analysts have pointed out that as a result of Russia's weakened economic performance in recent years and slow growth, authorities will want to minimise as much negative impact as possible. Asset bans and visa restrictions targeted at the wealthy may also increase pressure on Moscow to negotiate a settlement.

While the Russian economy expanded by 1.3 per cent last year, the Washington-based International Monetary Fund has projected a much lower 0.2 per cent growth this year due to the sanctions, in contrast to the forecast last year of 3.3 per cent.

“Russia is going to feel the pressure this year, and gross domestic product decline will continue in 2015. However, even without the sanctions the Russian economy would be weak. It is anyone’s guess if sanctions are effective and trigger a policy change towards Ukraine by Russian authorities,” said Michal Dybula, an economist at BNP Paribas.

Macro-Advisory's Weafer said that it was still too early to tell whether the new sanctions would bring about a change in policy from Moscow.

“Will they change Russia’s political stance towards East Ukraine? There is no evidence of that as yet. But the downing of MH17, which directly led to this move to stage three sanctions, was a major game-changer. It is still too early to be able to say what the political impact will be - but there will be a clearly negative economic impact,” said Weafer.


The EU has been heavily criticised by Russia’s biggest banks for including the financial services industry in its new round of sanctions.

Sberbank, Russia’s biggest bank by assets, said in a statement that the new EU sanctions would do nothing to ease the troubles in Ukraine and that they undermined “the foundations of the global financial system".

Weafer said that blocking the state banks from accessing US dollar and Euro debt beyond a 90-day maturity will cause a “squeeze” on the domestic Russian debt market.

“The banks will of course get access to state money via the central bank and the big corporations will also get access to state funds. But the small and medium-sized enterprises and individuals will find it tougher to access new debt and the cost of both servicing existing debt and any new debt will be higher,” said Weafer.

“We have estimated a 100-basis point rise in the short-term interest rate, which will hurt Russian GDP by nearly 1 percentage point after three to four quarters. This is quite a significant impact that will not only be weighing on the respective banks with restricted access to capital markets, but feeding into the Russian economy,” said Dybula.

“Certainly we are expecting the pressure on the Russian currency is going to remain high as private capital outflows accelerate. Wider ramifications of this will be that less money is available for domestic investment, which will harm overall economic performance,” he added.

In response to the crisis in Ukraine, a number of Western banks have already cut their exposure to Russia to protect themselves from potential risk as a result of the ongoing instability in the region. Citigroup, the US bank with the largest footprint in Russia, cut its total exposure by 5.3 per cent to $8.9 billion for the three months ending on 30 June, while Bank of America Merrill Lynch reduced exposure by 40 per cent in the first half of the year to $3.9 billion.

“With banks already reducing their exposure to Russia, the new sanctions are only going to exacerbate this,” said Dybula.

EU impact

But what about the impacts of sanctions on the EU?

So far, in retaliation to the sanctions, Russia has imposed an embargo on food imports from the EU, US and some other Western countries, leading the European Commission to promise financial support to EU vegetable and fruit growers.

The Polish prime minister has already said that sanctions would reduce Poland’s GDP by 0.6 per cent by the end of the year.

UK exports to Russia and Ukraine account for just 0.5 per cent of UK GDP, suggesting that little damage would be done to the UK economy overall. More significantly, Russia and Ukraine account for 1.1 per cent of EU GDP and 1.6 per cent of German GDP.

“I tend to think that some countries will be affected more than others, particularly those with stronger ties to Russia through financial or trade links,” said Dybula.

“The biggest hit we are going to see in terms of GDP will be the countries in Central and Eastern Europe. Poland in particular has been hit by Russia's ban on food exports, while Russian sanctions against Germany's manufacturing industry could hurt GDP by more than 1 per cent,” he added.

Weafer said that current sanctions could hit London harder than most other EU countries and warned that the potential future loss could be significant.

"If Russian banks and big corporations are now forced to seek alternative banking and financing arrangements in Asia or elsewhere, then they may keep those new relationships when the sanctions end," said Weafer.

"Russia has long-term plans for a huge increase in investment and for new listings. Normally the bulk of that would have gone through London. Now it may be more spread between other locations and London’s dominance of Russian banking may be lost," he added.