25.09.2022

Anti-Russian sanctions – a dangerous mistake?

US sanctions on “specially designated individuals,” introduced in April for numerous Russian oligarchs supposedly close to President Vladimir Putin, prohibiting US citizens from doing business with them or their companies, already have serious consequences for the global economy.

Oleg Deripaska fought to reduce ownership of aluminum producer RusAla and En + Group, a group of companies that control Oleg Deripaska’s assets in the energy, non-ferrous metallurgy and mining industries, despite the fact that the entry into force of the sanctions was postponed amid high-profile complaints Western partners of companies and customers. Bloomberg issued a warning along with two stock quotes instead of their prices previously set for Iranian and North Korean securities.

Sanctions had a significant impact, including a 10% drop in the ruble exchange rate, but observers were divided over whether they would change the behavior of the Kremlin.

Among those who support the sanctions, some went further and proposed expanding the list of “specially designated individuals” to the most important Russian state-owned enterprises. They argue that it makes no sense to ban a non-strategic company such as RusAl, bypassing Sberbank, VTB and Gazprom, leaving them available to the United States.

“In our opinion, the creation of conditions under which state-owned companies have become“ toxic ”to American investors, which will certainly affect most foreign investors, was a mistake. This will slow down important progress in Russia, ”Harvey Savikin, co-founder of the Firebird Managmeent fund, quotes the Financial Times.

In his view, the presence of American investors in Russian state-owned enterprises contributed to the positive cycle. In this case, improving corporate governance to meet Western expectations led to higher prices for stocks and bonds; this allowed financing at attractive rates at the international level, attracting more foreign investors, etc.

“Some state-owned enterprises, in particular Sberbank and the Moscow Stock Exchange, operate as efficiently as their Western counterparts. As for those who are less reformed (Gazprom, VTB), this could be even less effective, but for the probing eyes of a foreign investor, ”Savikin notes.

He admits that many Russian state-owned companies would have been privatized anyway, if necessary or under the guidance of those who came of age after the 90s and were trained in accordance with Western principles.

The corporate governance revolution has taken place on the Russian stock market: MSCI’s 5% dividend yield reflects how major sales and profits are converted into free cash flow and distributed to minority shareholders.

Nevertheless, a powerful incentive is the assessment of the best managers in London, New York and other financial centers. When leaders such as German Gref from Sberbank or Vagit Alekperov from LUKoil are present at international conferences, they are treated like any Western European executive director.

“Russian steel companies, which 20 years ago enjoyed knocking us out of their offices, are competing for the most profitable and environmental policies in pursuit of investor approval and dollars. The distribution of capital by managers in accordance with business goals, and not for the sake of replenishing their own offshore accounts, is a key element of Russia’s integration into the global economy, ”says Savikin.

As state-owned companies and large private companies begin to function efficiently and move away from corruption as something ordinary, this affects the economy and business culture. For the average Russian, all of the above is the norm.

Thus, the existing unique Russian institutions that comply with international standards are built by well-managed enterprises.

“So, in addition to these reasons, that, for example, sanctions against Sberbank will harm the Russian economy without an equal deterrent effect and that our European allies have business relations with companies such as Gazprom, and even depend on them – it would be a mistake to discourage the United States and other foreign participants in the Russian economy, which plays such a constructive role, ”Savikin concluded.

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