The Daily Update - Looking East

President Trump signed into law the U.S. government's Countering America's Adversaries Through Sanctions Act on August 2. This gives President Trump the power but not the obligation to impose sanctions not just on Russia but also North Korea, Iran and it also requires Congressional approval to remove them.

However, the US desire to use sanctions as a cornerstone of foreign policy has been met with a mixed global response. For example, European officials although having their own set of sanctions in place against Russia (that has recently been extended to January 2018) were said to be angered by the latest US sanction move and its potential to negatively impact European interests. Europe is a large gas importer from Russia: Gazprom supplies 34% of Europe’s energy needs and European companies have a significant pipeline of investments in energy and pipeline related projects. Although, the EU President Claude Juncker noted after the initial uproar: ‘if the Americans proceeded [with the adoption of new sanctions], we would be ready to react adequately in a matter of days. As a result, a significant proportion of the intended sanctions against Russia have been dropped. Moreover, the US Congress has now also committed to only apply sanctions after the country's allies are consulted. And I do believe we are still allies of the US’.

Another example was earlier this week when the US found it had to water down its proposed UN sanction package against North Korea in order to avoid a veto by Russia and China who were against an oil embargo and emphasised the importance of diplomatic negotiations to resolve the dispute. ‘Bill Richardson, the former US ambassador to the UN summed the situation up saying ‘better than nothing, but not enough to really pressure North Korea.’

Earlier in the month, President Putin while condemning the actions of North Korea as provocative noted at his BRICS Summit press conference: ’Sanctions of any kind are useless and ineffective in this case. As I said to one of my colleagues yesterday, they will eat grass, but they will not abandon this programme unless they feel safe.’ He was adamant that ‘Diplomacy is the only way to solve the North Korean nuclear problem’.

The issue is that sanctions are not always an effective tool.  For example, Russia has been able to weather the sanctions relating to the Ukraine debacle as it did not have a large amount of foreign debt outstanding and had an NFA position of +14% in 2012 (before the sanctions were imposed in July 2014): hence it was able to use its own sizeable buffers to meet its funding needs.  Plus, Russia also benefited from a having a flexible exchange rate to offset the ‘double whammy’ of weaker oil prices hurting government revenues.

Russia has also been pragmatic in looking to access capital from China and Asia offsetting some concerns that sanctions would hurt FDI. One of Russia’s competitive advantages is its large energy reserves which China is short of and thus there is plenty of scope for China and Russia to continue to work together.  For example, in 2014 Gazprom signed an USD400bn supply deal with CNPC in China to deliver 38bn cubic metres of gas per annum for 30 years from 2018. This week, the China Energy Company (GEFC) announced a deal to purchase a 14.16% stake in Rosneft from the Qatar Investment Authority and Glencore which sold down their 19.5% stake to 5.34%. This follows on from Rosneft and CEFC signing a strategic co-operation agreement earlier in the year for exploration and production and also downstream activities such as refining, petrochemicals and oil and petroleum product trading.

President Putin noted at the plenary meeting of the Eastern Economic Forum in Vladivostok in early September ‘We are open for deeper investment, trade and financial ties with all partners, both from the eastern and western coast of the Pacific Ocean, especially considering that investment opportunities in Russia's Far East are truly immense.’  We think Russia should be given some credit for being quick to look to the future and ‘look east’.