Russian tycoons take hit in Crimean row

March 23, 2014 - 11:39:49 am
A sign displaying currency rates in Simferopol, Crimea, yesterday. Crimea is adopting the Russian rouble as its official currency and will drop the Ukrainian hryvnia in April.

MOSCOW: Russia’s most powerful businessmen waited for over an hour on Thursday to hear from President Vladimir Putin, whose decision to annex the Crimean Peninsula has cost their companies hundreds of millions of dollars in market value.

When Putin finally showed up, he spoke to them for five minutes — and gave them no reassurances that they or their companies will get any respite from the uncertainty created by the takeover of a piece of land of little value to them beyond national pride.

Russia’s economy has been pinched by the crisis over Crimea, even before the new sanctions the US and Europe announced on Thursday.

The Russian stock market has tanked 10 percent this month, wiping out billions in market capitalisation. Economists have slashed growth forecasts to zero this year and foreign investors have been pulling money out of Russian banks. The Standard & Poor’s ratings agency cited all these issues when it cut its outlook for the country. Because US and European leaders have said they are willing to impose ever stiffer sanctions, ratcheting up the pressure on Russia step by step, the concern is how severe the penalties might get.

“The main risk is in the sanctions that have not been announced,” says Nataliya Orlova, chief economist at Alfa Bank in Moscow. “It’s hard to estimate the effect right now because we don’t know what they will be.”

The US slapped asset freezes on four businessmen linked closely to Putin as well as on a Russian bank that provides them support. If Putin does not back down over Crimea, as most expect, those sanctions could broaden further in coming weeks.

Russia’s economy was already weak going into the crisis, expanding only 1.3 percent last year. For this year, forecasts for growth of about 2 percent have been written off altogether, with Putin’s adviser Alexei Kudrin expecting no growth at all.

The ruble has lost 9 percent against the dollar in less than three months. That will make imports more expensive for average Russians. In a bid to support the currency, the central bank raised its main interest rate sharply last week from 5.5 to 7 percent, but that will hurt the economy, too, by making loans more expensive.

Investors took $35bn out of Russia in January and February — about half as much as in the entire preceding year. The outflows could soar to $50bn per quarter if sanctions get tougher, Kudrin has warned.

The big risk for Russia is if the US and Europe expand their sanctions to more aggressively target trade relations. That would be a last resort, at least for Europe, which has a lot to lose itself: It imports a third of its gas from Russian and has strong trades ties.

But even if outright trade embargoes are avoided, the risk of possible sanctions is itself damaging. Investing or lending in Russia will carry higher risks, investment decisions will be delayed and investors will feel inclined to keep on selling stocks, says Charlie Robertson, an analyst at Renaissance Capital in London.

At least publicly, Russian tycoons are keeping a low profile.

At the business group meeting chaired by Putin on Thursday, Alexei Mordashov, worth around $13bn, and Dmitry Pumpyansky, worth $2bn, did not utter a word of concern or complaint — even though their companies have been getting slammed in the stock markets. Shares in Mordashov’s Severstal, Russia’s largest steel company, dropped 13 percent this month, cutting the company’s capitalisation by about $900m. Stocks in Pumpyansky’s pipe 

producer TMK lost 19 percent this month, with the company losing more than $500m of its market value. 

The tycoons’ silence stems from a deal they struck with Putin more than a decade ago to give up any political ambitions in exchange for a free hand in their business affairs. 

Since the arrest and imprisonment of businessman Mikhail Khodorkovsky in 2003, no billionaire has ventured to question Putin’s fundamental policies.

Metals tycoon Vladimir Potanin, who is believed to be worth $14bn, says he’d “thought a long time ago about what we’re going to do in case some sort of sanctions are introduced.”

He says his companies, which include Norilsk Nickel, are using “multiple currencies” to diversify risk. Potanin, however, insists that neither he nor his partners expect sanctions to get so tough that they would hurt trade.AP