Russia: A Political Risk Assessment (Economic Intelligence)

February 22, 2017

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By:  R. Sonny Betancourt, Co-Founder, Lynx Global Intelligence

 

US – Russia Business Talking Points

Key Judgements

Engaging in business with Russia is complex. The United States is currently in a complicated relationship with Russia. The allegations of Russian hacking, influence on the US Presidential election and overall pent up hostility over actions in Syria, Crimea and Ukraine has complicated the relationship even further. The sanctions in place against Russia will require congressional support and consultation in order to be lifted.

Introduction

Doing business in Russia requires understanding the business climate, cultural nuances and ramifications of US-imposed economic sanctions.  Expertise is required to handle the current frameworks as well as this byzantine business maze. Business with Russia requires a business background with proficiency in foreign policy, security and regional dynamics. Currently, both US bilateral trade and investment relations have been obstructed or outright frozen.  This exposes companies to potential political risk in the spheres of political, economic, technological, legal, and regulatory frameworks.

Background

Globally Russia is the 8th largest economy (GDP) and 6th largest purchase power parity (PPP) and has over 142 million potential customers, acute infrastructure needs and is a vital export market for US businesses. Russia has a highly-educated culture that spans 11 time zones but there are significant barriers to entry: sanctions, corruption, burdensome regulations, competition from large state-owned entities and inadequate rule of law. Sanctions against Russia currently are the biggest barrier to entry. The sanctions regime against Russia was put in place in March of 2014 in response to Russia’s invasion and annexation of Crimea and use of force in Ukraine.  The sanctions primarily targeted 14 defense companies, 6 banks and 4 energy companies.  These sanctions include goods, services and credit financing.[1] Since the implementation, the sanctions have already caused Russia well over 100 billion in economic losses.

Sanctions (backgrounder)[2]

  • Executive Order 13660
    • Sanctions put in place restrictions on the travel of certain individuals and officials and showed our continued efforts to impose a cost on Russia and those responsible for the situation in Crimea.
  • Executive Order 13661
    • Prohibiting the provision, exportation, or reexportation of goods, services (not including financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation
    • Sec 3 – Suspended entry of immigrant/nonimmigrant deemed detrimental to United States
  • Executive Order 13964[3]
    • Harm or compromise the provision of services by entities in a critical infrastructure sector;
    • Disrupt the availability of a computer or network or computers; or
    • Cause a misappropriation of funds or economic resources, trade secrets, personal identifiers or financial information for commercial or competitive advantage or private financial gain.
    • Order 13964 Expanded (December2016)
    • Russia’s Main Intelligence Directorate (Glavnoe Razvedyvatel’noe Upralenie or “GRU”);
    • Russia’s Federal Security Service (Federalnaya Sluzhba Bezopasnosti or “FSB”);
    • Special Technology Center (STLC, Ltd. Special Technology Center St. Petersburg);
    • Zorsecurity (Esage Lab);
    • Autonomous Noncommercial Organization Professional Association of Designers of Data Processing Systems (ANO PO KSI);
    • Igor Valentinovich Korobov, Chief of the GRU;
    • Sergey Aleksandrovich Gizunov, Deputy Chief of the GRU;
    • Igor Olegovich Kostyukov, First Deputy Chief of the GRU;
    • Vladimir Stepanovich Alexseyev, First Deputy Chief of the GRU;
    • Evgeniy Bogachev; and,
    • Aleksey Belan.
  • A group of US senators (both Republican and Democrat) and a separate house bill are poised to introduce legislation to prevent President Trump from lifting Russian sanctions

 

Economics (O&G snapshot)

  • Russian oil and gas companies including Rosneft, Transneft and Gazprom Neft have been blocked from securing long-term financing from US banks which has halted numerous large scale oil and gas projects[4]. These projects include expansion in the Arctic.
  • Well over 50% of Russia’s GDP comes from oil and oil activities[5] The sanctions in turn have crippled GDP and have also delayed or completely stalled new O&G development actions.
  • The Yamal LNG project ($27 billion dollars) could not obtain US financing and had to resort to Chinese banks. Chinese financing is less advantageous and is both more expensive and less flexible.
  • Lack of ability to finance exploration and production activities to find new oil plays and restrictions on U.S. technology purchases had a detrimental effect on Russian GDP (half of fracking tech used in Russia comes from the US). These restrictions could impact Russia’s overall O&G competitiveness on a global scale.
  • Import/Export trade constitutes 51% of GDP[6] This area has been significantly impacted due to both US and EU sanctions. The EU represents 8.4% of total Russian imports and is Russia’s biggest trading partner, constituting 48% of total foreign trade. Russia’s exports are dominated by mineral fuels 74.9% which has historically contributed to a Russian trade surplus in the range of 180 billion euros annually. (Notably gas was not under EU sanctions as member states are reliant on Russian gas).
  • All restrictions against IT & cyber-related products against the FSB were lifted on February 1, 2017[7]

 

Business Outlook/Industries

  • Russian Major Industries
    • Oil and Gas
    • Mining
    • Chemical/Petrochemical
    • Metallurgy
    • Agriculture
    • Weapon and Military
    • Aircraft Building
    • Aerospace
    • Transport
    • Pulp and Paper
    • Precious Stones

 

Forecasting

  • Lifting of the sanctions will be a boon for US oil and gas, banking and export industries
  • Easing as opposed to lifting sanctions are more likely to occur
  • Coordination in Syria and counterterrorism-related activities could potentially soften US stance
  • Academic and creative dialogues must be considered to repair foreign relations, security coordination and diplomatic dialogue
  • Opportunities legally exist within US businesses currently engaged in Russia – PepsiCo, Proctor & Gamble, McDonalds, General Motors, Johnson & Johnson, Alcoa, GE, Morgan Stanley and Cargill

 

Takeaways

  • The U.S.-Russian relationship is strained and requires adept, insightful analysis outside typical political dogma. How can we wage peace and reach an agreeable solution? Is it even possible to reach a diplomatic accord?
  • Russia has been buttressed by increased oil prices but has little control over sanction influence of global economy and domestic job losses.
  • How long can Russia continue to have sanctions impact GDP?

 

Historical Russian GDP Growth Rate Trending

A correlation between sanctions and a major drop in Russian GDP growth is clearly illustrated (see graph below). The sanctions will not remain in place indefinitely and need to be addressed before economic realities lead to potential conflict.

The ability to weather the storm requires adept business and geopolitical prowess. Doing business in Russia is possible but requires moving outside the realm of sanctioned sectors and positioning to be prepared when sanctions are lifted. Guidance within these frameworks requires expertise.

russia-gdp

Lynx Global Intelligence – Intelligence for Good

Lynx Global Intelligence provides an outside the beltway approach, dealing in fact, guiding companies currently in Russia to hedge their bets and provides the legal understanding to deal in a complicated geopolitical risk environment.

A looming Russian bank crisis, continued sanctions, reduced foreign direct investment, increased distrust and potential increased belligerency, requires a counterbalanced strategy. Tactics within the strategy should include maintaining open channels of communication, seeking negotiated solutions, and permitting U.S.-Russia foreign affairs to practice the waging of peace. Dealing with Russia requires a strong but respectful approach. The ability to engage in construction dialogue requires a balanced policy. This nuanced reaction requires an aptitude that Lynx Global Intelligence can navigate within security, economic, energy, investment and geopolitical realities to craft a business solution based on the realities on the ground.

[2] https://www.state.gov/e/eb/tfs/spi/ukrainerussia/

[3] http://www.polsinellioninternational.com/blog/2017/1/13/2017-begins-with-additional-us-sanctions-on-russia-for-malicious-cyber-related-activities

[4] http://www.forbes.com/sites/timdaiss/2016/08/19/prolonged-sanctions-rip-into-russia-causing-angst-for-putin/#cd8f3fc4c2f6

[5] http://carnegie.ru/commentary/?fa=61272

[6] http://www.heritage.org/index/country/russia

[7] http://www.usatoday.com/story/news/2017/02/02/us-eases-some-economic-sanctions-against-russia/97399136/

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