Here’s still more evidence that at least the financial part of the sanctions on Russia is having an effect: Yuri Soloviev, the deputy chairman of VTB, Russia’s second largest lender, wrote an op-ed to complain about how Chinese financial firms are declining to work with their Russian counterparts these days. In his piece in Finance Asia titled “Unlocking the Potential of Russia-Asia Cooperation”, after the usual platitudes about all the things going well, he gets to a section called “sticking points”:
China’s ambiguous position regarding Russian banks in the wake of US and EU sanctions is a key issue holding back progress toward greater bilateral cooperation. Most Chinese banks will currently not execute interbank transactions with their Russian peers. In addition, Chinese banks have significantly curtailed their involvement in interbank foreign trade deals, such as providing trade finance.
China’s domestic capital markets are another area of untapped potential. Currently, foreign companies are barred from raising equity or debt capital on China’s local yuan markets.
Avid TAI readers might recall Anders Aslund earlier this year pretty much predicting that the financial sanctions would start to leave a mark:
The Dodd-Frank Act and similar EU regulations have reinforced the powers of U.S. and EU financial regulators, compelling international banks to exercise extreme caution. The banks’ internal due diligence departments are far more strict than the actual law, and they prevented loans to Russian companies from going through even when the transactions were formally legal, because they feared that the rules might suddenly change. Even Chinese state banks are now reluctant to lend to Russia. As a consequence, Russia has become exposed to a liquidity freeze.
A liquidity freeze or “sudden stop” of international financing is a frightful condition. It hit much of the world after the Lehman Brothers bankruptcy on September 15, 2008. The smaller and the more financially exposed an economy was, the greater the damage. Three of the worst-hit economies were the Baltic countries—Estonia, Latvia and Lithuania—which faced GDP slumps of 14-18 percent in 2009. Interestingly, these three countries had state finances that were as stellar as Russia’s, with more or less balanced state budgets and minimal public debt, before the crash, but it did not save them. Thus these Russian virtues are beneficial, but are no guarantee of financial stability. The key commonality of these four countries is that they all lacked access to international finance. For the Baltic countries, the liquidity freeze lasted only three quarters. It is likely to last much longer for Russia.
Why does this matter? While the Russian state under Vladimir Putin paid off all its debt and tucked away a sizable rainy day fund in the 2000s, Russian firms are deeply indebted. We once again direct you to the excellent piece by Vladislav Inozemtsev from a few months back for context:
Russia throughout the 2000s remained an economy with high inflation, and therefore with high interest rates. At the same time, the ruble/dollar exchange fluctuations were relatively small during the whole period (30.6 rubles per dollar in early 2002, 24.4 rubles per dollar in early 2008, and 33.1 rubles per dollar in early 2014). In such circumstances large Russian companies listed on foreign stock exchanges and showing healthy financial results easily obtained three- to ten-year loans from foreign banks at 3.5–5.5 percent per annum, instead of paying 12–14 percent for one- to two-year loans from Russian banks. As a result, by the beginning of 2014 Russian corporations owed foreign creditors more than $678 billion (22.4 trillion rubles), while borrowing from Russian banks totaled only 19.3 trillion rubles. Most of these foreign loans were constantly replaced by new ones; in other words, the corporations borrowed money not just to acquire additional capital but also to pay off older obligations—but their overall amount of debt grew steadily by $60–70 billion per year from 2009 to 2013.
Bills coming due, income drying up, and no way to borrow money: it’s a sticky situation for anyone to be in. The Kremlin might try to put on a brave face by talking about meeting EU sanctions with counter-sanctions of their own. But the truth is, they’ve got an incomparably weaker hand to play. They’re vulnerable, and they know it.