Economic sanctions against Russia: their influence on banking sector

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vernment of the Russian Federation, HSE E. G.

1 «6th International Conference on Business and Economic Development (ICBED)» New York, USA, April 2017 R. M. Nureev Financial University under the Government of the Russian Federation, HSE E. G. Busygin HSE Economic sanctions against Russia: their influence on banking sector Economic sanctions as an instrument for regulation of cross-countries relations; Economic sanctions against Russia; Banking sector;

2 Quantity of imposed sanctions Quantity of imposed sanctions since year Made by authors with using data from Gary Hufbauer, Jeffry Schott, Kimberly Elliot, Barbara Oegg Economic sanctions reconsidered. US: Peterson Institute for International Economics, P. 2

3 Economic sanctions as an instrument In XX century, countries start to actively utilize such an instrument as sanctions to reach their political and economic goals. After World War II, on average in the five-year period, almost 14 cases of sanctions were initiated, while before 1945, the average number of cases was approximately 2; The majority of sanctions were introduced by the United States against other countries, including the USSR; Their main aim was to worsen the military potential of the countries under sanctions, and destabilization of national regimes. Source: Gary Hufbauer, Jeffry Schott, Kimberly Elliot, Barbara Oegg Economic sanctions reconsidered. US: Peterson Institute for International Economics, P

4 Economic sanctions could affect International trade; Investment flows; Financial operations; Research and development partnerships; Transport communications. Source: Zagashvili Z. Western sanctions and Russian economy // World economy and international cooperation P (RUS) 4

5 Potential consequences of imposed sanctions for target country Effects in short run Effects in middle run Effects in long run Import reduction of medication; agricultural products; machinery and equipment, and others. Export reduction and closing access to financial resources Decrease of the diplomatic role in the world Health care deterioration of the quality of life; increase in mortality; lack of access to medical equipment Food problem rising food prices; reduction of basic foodstuffs. Economy lower wages and purchasing power; higher inflation; an increase in the unemployment rate. Health care growth of diseases; reduction of national capability to provide health services of good quality. Economic loss of trading partners and international investors; negative consequences for government and private infrastructure Social problems psychological effect; the growth of social inequality; poverty increase. Politics change the balance of power in the regions; Source: Anup Shah Effects of Iraq Sanctions, article electronic source 5

6 Factors influencing the success of the ongoing sanctions Factors/Authors Bapat and etc. (2013) Major (2012) Hafbauer Drezner and etc. (2011) (2007) Economic factors Kaemfer and Lowenberg (2007) Trade dependency + + i i Duration - Several countries applying sanctions against another country Cooperation of the target country and third countries as a result of sanctions Meyers and Morgan (2002) i Political factors Irfan Nooraddin (2002) - i The authoritarian regime in the country target - - The importance of the - causes of conflict in a country against which the sanctions are imposed Source: Oxenstierna S., Olsson P. The Economic Sanctions Against Russia: Impact and Prospects of Success. Försvarsanalys, Totalförsvarets forskningsinstitut (FOI),

7 Comments on factors On one hand, the higher the costs, the greater the possibility of achieving the goals of other states, but on the other and, high costs can become a reason for rejection in implementing sanctions or their design will be shallow; The duration of sanctions should positively influence the success of their implementation the longer they are enacted, the greater the costs. Still, Hafbauer in his book Economic sanctions reconsidered showed that the duration of sanctions negatively influences their final success, since the country eventually adjusts to new reality; The quantity of countries, partaking in imposing sanctions negatively influences on their success. Source: Oxenstierna S., Olsson P. The Economic Sanctions Against Russia: Impact and Prospects of Success. Försvarsanalys, Totalförsvarets forskningsinstitut (FOI),

8 Sanctions against Russia US, EU and other countries have imposed economic sanctions, which affected oil industry (the sanctions against oil companies and their subsidiaries; restrictions on export of oil technology and oil refining in Russia); gas industry (sanctions against gas companies and their subsidiaries, "the rejection of the joint projects in the gas sector and the investment perspective projects"); the banking industry (freezing "of financial assets of individuals and entities" from Russia, "the restriction of access to foreign loans"). Source: World Economy and Information Center, internet source 8

9 Central Bank of Russia raised the key interest rate three times in the 4th quarter of 2014 in order to cope with the instability which has led to a rapid rise in prices for loans. Quite negative for banking system was the growth of the key rate from 10.5% to 17% ( ). Thus, the key rate has increased from 5.5% to 17% in Rising prices hit consumers, at least on three sides: 1. Enterprises bankruptcy with increasing debts on loans led to an increase in unemployment. 2. Consumer, mortgage and auto loans have become more expensive. 3. Falling of ruble led to a sharp increase in the price of imported goods. Source: Central Bank of Russian Federation, internet source Nureyev R.M., Petrakov P.K. (2015) The average consumer: the burden of economic sanctions against Russian. Journal of Economic Regulation (Questions of economic regulation), 6(3) 9

10 Key interest rate (%) Source: World Bank Russia Economic Report 2016 N36 P

Quarterly changes in Russian GDP 2011-2016 (in constant prices of 2011) GDP bln. rub. Quarter/Year 2011 2012 2013 2014 2015 2016 I quarter 13 255.3 13 954.6 14 039.4 14 129.9 13 736.2 13 576.

11 Quarterly changes in Russian GDP (in constant prices of 2011) GDP bln. rub. Quarter/Year I quarter II quarter III quarter ,5 IV quarter The table is compiled according to the Federal State Statistics Service data Source: Federal State Statistics Service // internet source 11

12 Russian International Reserves from 2011 to 2016 (mln. dlr.) Source: Trading Economics // internet source 12

13 Comments on Russian International Reserves From 2014 the gold and currency reserves of the country are depleting; The most sharp decreases occurred since August of 2014; By the start of 2015, the international reserves contracted by 24.6% compared to the start of 2014, and the decrease by 19.1% occurred from the period of August 2014 till January 2015; As a result, if at the international reserves of Russian amounted to million dollars, then by this indicator was at the level of million dollars. Source: Central Bank of Russian Federation, internet source 13

14 Russian government bond yield curve 2015 и 2016 Source: internet source 14

15 Comments on Russian government bond yield curve Bond rates were higher a year ago as compared to current rates which symbolizes the fact that the uncertainty of investors was higher a year ago than in Still, the yield curve is declining both in short-term bonds (6 months maturity), where the rate of return is 10%, while for long-term bonds of 10 year maturity the return is around 8%. This shows that short-term risks are estimated to be higher than the long-term ones by the investors. Source: Central Bank of Russian Federation, internet source 15

16 The situation in the banking sector: main causes of problems Due to implementation of sanctions, Russian banks encountered a problem, connected with attracting loans from the West; The depreciation of Russian ruble in relation to the world currencies (including dollar and euro); Stagnation in the real sector of Russian economy, as a result of which the foreign investors stopped to fund Russian banks; Massive revocation of licenses by Central Bank. Source: Bychkov A.A., Podlinnih D.A. (2015) Russian banking sector is under the influence of the crisis Molodoi ucheniy, (90). P (RUS) 16

The external debt of the banking sector of Russia by quarters from 2012 to the 3nd quarter of 2016 (billion US dollars) External debt of private banks (bln. dlr.

17 The external debt of the banking sector of Russia by quarters from 2012 to the 3nd quarter of 2016 (billion US dollars) External debt of private banks (bln. dlr.) External debt of banks with state participation (bln. dlr.) Source: Central Bank of Russian Federation // internet source 17

18 Comments on the external debt of the banking sector of Russia The difference in foreign debt data for the third quarter of 2016 as compared to the first quarter of 2014 is in decrease of 62% for private banks and 52% for banks with government participation; This means that banks lower their current obligations but at the same time, not having an opportunity to borrow abroad, do not attract additional resources from the West. 18

19 Volume of loans (in rubles and foreign currencies) given out by Russian banks, and overdue loans from 2011 to 2016 (in trln. rubles) Compiled by the authors according to the Central Bank data Source: Central Bank of Russian Federation // internet source 19

20 Comments on volume of loans given out by Russian banks and overdue loans The combined average growth rate (CAGR) on loans amounted to 10% from 2011 to the end of 2014; In 2015 there was a sharp decline in the volume of loans both in rubles and in foreign currencies, which amounted to 11.1% as compared to 2014; Moreover, by 2016 the amount of overdue loans increase by 92.3% comparing with 2014, which presents a problem not only for the banking sector, but also for the real sector of the economy. 20

The impact of sanctions on the curves IS-LM-BP in 2014-2015 i, % LM 1 LM 0 3 ВР 1 2 ВР 0 8,25 E 2 E 0 E 1 1 IS 0 IS 1 Y 1 =60 Y 0 =63 ВВП GDP 2014-2015, 2014-2015, trln. трлн.

21 The impact of sanctions on the curves IS-LM-BP in i, % LM 1 LM 0 3 ВР 1 2 ВР 0 8,25 E 2 E 0 E 1 1 IS 0 IS 1 Y 1 =60 Y 0 =63 ВВП GDP , , trln. трлн. rub руб (in constant prices of 2008) Source: Nureev R.M., Chusovlyanov D.S. Bank of Russia's Policy in the face of economic sanctions: a step forward or two steps back?; journal The Business and Management Review, Vol.8, No 1, P

22 The impact of increasing the refinancing rate on curves IS-LM-BP 22

23 Final conclusions The banking sector of Russia is in a state of crisis, despite the measures attempted by the Central Bank; In 2014, the Central Bank introduced regulatory easements (for instance, easements in regards to rates for loans and deposits); There was an additional capitalization of banks by the government amounting to 830 bln. rubles; Despite this, the problems with bad debts and growth in overdue loans remains unsolved and a high volatility of Central Bank interest rate, which was observed for the past 2 years, does not help to improve the situation. 23

24 Thank you for your attention!

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