The new US sanctions announced earlier this week may slow down Russia’s economic growth by around 1-1.5 percentage points, restricting annual GDP growth to 1% at best instead of the planned 2%, as estimated by Alexander Knobel, Head of the International Trade Department at the Russian Academy of National Economy and Public Administration, Vedomosti writes. Restrictions boost economic costs, making flights, dealmaking and imports more expensive, Alfa-Bank’s Chief Economist Natalia Orlova notes, adding that the experience of other countries shows that sanctions slow down GDP growth by 1.5 percentage points per year on average. However, since Russia is mainly facing financial restrictions, the country’s GDP is unlikely to lose more than 50 base points, she adds.
Knobel does not expect Russian citizens to experience significant inflation spikes and drops in revenues, though the living standard will continue declining, he says. Natalia Akindinova, Director of the Center of Development at the Higher School of Economics, believes that the new wave of sanctions will further wrap up capital flows, though she sees no risks for the budget, as Russia next to no external borrowings, while the weakening of the national currency adds revenues, the newspaper writes. She notes though that there are risks for private investments. Knobel says that foreign companies will bear risks in any cooperation with the Russian economy, while the most threatening proposal is to restrict dollar-denominated transactions for state-held banks.
Meanwhile, a consensus forecast of analysts of top Russian banks conducted by Izvestia daily says that GDP growth will equal 1.6% in 2018, while inflation will amount to 3.5%. The consumer sector is the main contributor to the Russian economic growth, the paper says. The risk of new sanctions has been particularly mentioned as a major constraining factor.
Earlier reports said that the Washington administration announced sanctions to be imposed on Russia as of August 22 over Moscow’s alleged involvement in the poisoning of former Russian intelligence officer Sergei Skripal and his daughter Yulia in the UK, on March 4. According to the US Department of State, the US authorities are going to decide on unveiling the second package of sanctions against Moscow in 90 days’ time depending on whether it fulfills a number of conditions.
On the next day after new anti-Russia sanctions were announced, the US State Department apparently changed its mind to ban flights for Russia’s top air carrier to the United States, Kommersant writes. A high-ranking State Department official said on Thursday that the sanctions would apply to Aeroflot “to the degree that Aeroflot is a Russian state-owned or state funded company and to the degree that anyone applies for an export license to supply goods that are controlled under this system to Aeroflot.”
Amid tensions between Russia and the west, Aeroflot has been facing difficulties in obtaining US visas for its crews since 2017. However, in its spring-summer schedule the company raised the number of flights to Miami and New York and set larger jets to Los Angeles. The number of flights and passengers carried to North and Central America rose by 15.7% and 10.6%, respectively, in Q1 2018, Kommersant says with reference to the company’s IFRS financial report. Director of the VETA expert group Dmitry Zharsky considers a potential loss of US routes for Aeroflot to be “critical” as its revenue from those flights amounted to 25.8 bln rubles ($385 mln) in 2017 against 22.3 bln rubles ($333 mln) to CIS countries.
A potential ban is a direct violation of an intergovernmental agreement between Moscow and Washington, which describes Aeroflot as an appointed carrier, a source in the sector told Kommersant. Another source suggests it is unlikely that Russia would restrict flights for US cargo companies in response, as Washington may ban Aeroflot flights over US territory to Cuba, the Dominican Republic and Mexico in response. Sources also told the newspaper that agreements on aviation equipment supplies might be revised.
Presidential Aide Andrei Belousov has been given the green light from President Vladimir Putin to go ahead with the initiative of taking out as much as 513.7 bln rubles ($7.6 bln) from Russia’s top mining, chemical and petrochemical companies, despite the government’s previous pledges not to raise the tax burden on businesses. Kommersant and Vedomosti wrote on Friday that Belousov emphasized the need to task the government with presenting proposals regarding additional sources of revenue of 14 companies in a letter, which was endorsed by President on July 28. The funds are required to pony up the cash for implementation of Putin’s new package of decrees revealed this May, the Presidential Aide explained. As an example he cites the situation of 2016, when it was decided to take out extra revenues from oil and gas companies to replenish the government’s coffers, which gave the budget around 600 bln rubles ($8.9 bln) in two years, Kommersant writes.
According to Belousov, thanks to the market environment in 2017 Russian mining and chemical companies managed to receive a total of over 1.5 trillion rubles ($22.4 bln) worth of EBITDA, while the tax burden was only 7% compared with 28% for oil producers. “Leveling out profitability” to the oil and gas sector’s rate “provided that investment opportunities persist” will add 513.7 bln rubles ($7.6 bln) to the budget, he wrote, adding that since no tax mechanism for a move like that exists yet, it has been proposed to discuss it with the government.
The list of potential budget donors mentioned in Belousov’s letter includes such companies as Norilsk Nickel, Alrosa, Sibur, Polyus Gold, Evrax, Acron, NLMK, Severstal, MMK, Metalloinvest, Suek, Mechel, PhosAgro and Uralkali. Mechel, which has been negotiating its debt restructuring with banks for quite a while, is hoped to add 11.49 bln rubles to the budget through higher taxes, sources told Vedomosti. Most of abovementioned companies were taken aback by the news, a source in the sector told Kommersant. Two other sources expect explanations to be given at a meeting at the Industry and Trade Ministry scheduled for Friday. “So much for all investment programs/all investment programs may be put into cold storage,” one of them told the paper. Another noted that the calculation of both ‘bumper profits’ and painlessness of the takeout “requires additional estimations.”
Majority owner of the Russian steelmaker NLMK Vladimir Lisin, who also heads the National industrial Russian Steel Аssociation with such members as Severstal, Evraz, MMK and Mechel, has criticized the idea of the Presidential Aide in a statement (obtained by Vedomosti). It stresses that the tax burden should be calculated not on the base of revenue, but on profit, which serves as a source of investments, dividends and public payments. Meanwhile, experts admit that Russian mining and chemical companies have been paying out solid dividends, enjoying favorable market conditions over the past several years. “The bulk of Russia’s metal companies are exporters benefiting from a weak ruble and price growth. Many have reduced the tax burden and offer dividends with yield often exceeding 10%, which is why no wonder the government has taken an interest in raising budget proceeds,” Aton’s Andrei Lobazov told Kommersant. However, if enforced, the proposed measure is likely to affect the companies’ investment attractiveness and dividend payouts negatively, he added.
As Moscow and Beijing are planning to hold yet another round of strategic security consultations early next week, Washington takes it as a confirmation that the two countries have been allegedly creating an anti-Western military bloc to challenge the US global leadership, Nezavisimaya Gazeta said. London has also warned that the West is unduly ignoring the alliance being formed by the two neighbors. According to the paper, British, American and Japanese political analysts are urging to drive a wedge between Moscow and Beijing to prevent a rapprochement. Japanese Prime Minister Shinzo Abe has been “smarter than others” in this respect, the paper writes: assuming efforts to make friendship with Russian President Vladimir Putin recently, he has his eye set not only on solving the Kuril Islands issue, but also on diminishing the harmony between Moscow and Beijing, the paper notes.
“Officially, there is a model of comprehensive strategic partnership between Russia and China,” Andrey Karneyev, deputy director of the Institute of Asian and African Studies at Moscow State University, told Nezavisimaya. “They have similar views on many international issues and are actively expanding collaboration, though this partnership is not turning into a military-political union. Such a union should be targeting a common opponent. Neither from the viewpoint of China, nor from the viewpoint of Russia is there any need to enter a union like that,” he elaborated.
Karneyev believes that the alliance-related talks have intensified over the fact that the Washington has been pointing to Russia and China as opponents that are allegedly challenging the democratic values. The expert considers it imprudent to use it as a base for creating any union, “all the more so as we had the experience of such a union in the 1950s.” “It was formed by Stalin and Mao Zedong, but turned out short lived,” he said, and “this experience prompts the Russian and Chinese elites to have a balanced approach, avoiding extremes.”
NATO countries, particularly the United States, are upgrading the Georgian army in a move to turn the country “into a base of operations to create a threat for Russia from the south,” Abkhazian President Raul Khadzhimba said in an interview with Izvestia. “New pieces of armament are supplied, the military personnel is trained overseas and on the (Georgian) territory aided by foreign instructors,” he said. “From their side, Russia and Abkhazia have signed a number of military cooperation agreements to prevent such threats,” the President added. Asked whether the republic maintains any contacts with Georgia, he said that currently there are only contacts related to “cooperation in the Geneva discussions format,” which are headed by the EU, UN and OSCE and attended by representatives of Russia, Abkhazia, Georgia, South Ossetia and the US.
According to Khadzhimba, the issue of signing a legally binding agreement on non-use of force with Tbilisi is particularly relevant now. “The Georgian side does not accept it,” he said, adding that “as long as the threat of resuming war exists, substantive negotiations are out of the question.” The President also mentioned plans to join global organizations, such as the CIS, the Collective Security Treaty Organization and the Eurasian Economic Union. “There are such plans, but the reality is that the majority of the Eurasian space participants have not acknowledged Abkhazia yet,” which prevents the republic from establishing a full-fledged relationship with other countries.
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