AUG 2, 2017 @ 02:08 PM
As Trump Signs Russian Sanctions Law, Market Yawns And Germans Panic
So Donald Trump signed the Russian sanctions bill into law on Wednesday and...Russian stocks beat the S&P 500. As of early afternoon trading on Wednesday, the VanEck Russia (RSX) exchange traded fund, the biggest trade into Russia, was up 0.6%, beating the benchmark emerging markets index as well. Take that, Russophobes.
Trump had no choice. Despite campaign talk about it being better to get along with the Russians than to fight them, particularly on the terrorist front, the beleagured President had no choice but to sign it. It was veto proof, anyway. Hawkish Republicans unanimously joined Democrats angered over Hillary Clinton's loss in November and eager to blame the Russians for it, slapped worldwide sanctions Russia's oil and gas companies and made it a little harder for Russian banks to get short term financing from Western lenders.
Had Trump postponed signing it, politicians on both sides of the aisle would have held it up as an example of collusion.
What started out as a sanctions program designed to punish Russia for supporting anti-government forces in Ukraine has now officially expanded into punishing Russian companies and certain individuals for supporting Bashar Assad of Syria and supposedly meddling in the U.S. election, something the U.S. does and brags about on a regular basis. The law codifies the sanctions regime and makes it impossible for Trump to remove them without congressional approval.
The measures are designed to punish some of the biggest state-owned enterprises like Rosneft and Gazprom, seen as the major competitors to U.S. energy interests in Europe.
One Russian executive from a big investment bank who did not want to be quoted on the record pointed out today that the sanctions law accomplishes two things at once: "politically, it gives Washington the power to sanction Russia globally for its role in Ukraine, and in terms of big business, it makes it much harder for Russian energy companies to develop shale drilling capabilities, not to mention the fact that it scares Europe into importing American gas."
The Nord Strem II pipeline connecting Russia to Germany is sanctioned. That's hit some very powerful European oil and gas firms square between the eyes with a two-by-four. Germany's Economic Minister Brigitte Zypries called the sanctions a "violation of international law".
Germany's Economy and Energy Minister Brigitte Zypries. Germany now has another reason to dislike Trump: sanctions on Nord Stream II. (Photo by Adam Berry/Getty Images)
On one hand, Nord Stream II is an alternative route for Russian gas into Europe, its main market, rather than through Ukraine. Russia's Gazprom has been battling the Ukrainians for over three years now. Ukrainian energy giant, Naftogaz, says that if Nord Stream II is built, Russia will no longer need those pipelines to get its gas into Europe. Ukraine is currently importing gas from central European countries, and then selling it to Europe. In Washington's view, punishing Nord Stream II is a nod to Ukraine.
Imposing the Nord Stream II sanction is up to Trump, who now has some serious leverage in Europe.
"If you're making invesmtents in Nord Stream, then you are exposing yourself to sanctions, but that is not the end of the analysis," says Sean Kane, former Deputy Assistant Director for Policy at the Treasury Department's Office of Foreign Asset Control. He is now counsel with the Hughes Hubbard international law firm in Washington. Kane was responsible for policing Russian sanctions under the Obama Administration. "We have to see how the President will approach this issue. Nord Stream II is entirely up to Trump," he says. "It gives him a lot of leverage over Europe to be quite honest."
Europe, and Germany in particular, should not fear that Trump will use Nord Stream as blackmail. Trump said in his statement today that he felt Congress was too heavy handed, and that the sanctions "could affect American companies and our allies."
Trump also blasted Congress for forcing his hand by "limiting the Executive’s flexibility." He said the bill makes it harder for the president to strike deals independently without having to run to a divided congress for approval. "The Framers of our Constitution put foreign affairs in the hands of the President. This bill will prove the wisdom of that choice. Yet despite its problems, I am signing this bill for the sake of national unity."
The Russian government also has a vested interest to spin Europe on this issue. If there is a breach with Washington on sanctions, then it is to Russia's benefit. "The fact that this pipeline exposoure exists is chilling to say the least," Kane says.
When asked about Congress's request for Treasury, State and the Director of National Intelligence to report on whether owning Russian government bonds and equities of sanctioned companies was a violation of sanctions, Kane said that investors should not speculate on that report. The report is due within six months.
"Whatever comes out of their report, it will not give us the authority to go out and sanction," he says, adding that it would require another step from the President. "I think Treasury already has a view on this and they will say to congress: here are the risks and the potential downside impacts of sanctioning Russian securities. I consider this request more of a signaling devise than anything else."
At least now U.S. oil and gas companies that sell equipment to Russian drillers know how long these sanctions will last: figure forever.
The law bans companies from doing business with oil projects where Russians have a 33% stake or more, providing that it is a deepwater or Arctic drilling project. For instance, Lukoil recently won a concession to drill for oil off the Mexican coast. They have a 50% stake in that endeavor. But because the oil well is not over 500 meters deep (1,640 feet), American oil and gas equipment companies are allowed to sell to Lukoil.
Exxon was recently fined $2 million by Treasury for signing legal documents with Igor Sechin, the sanctioned CEO of Rosneft. Exxon is suing Treasury for the value of the fine. companies have benefited from sanctions. Russian agribusiness has been on a tear thanks to counter-sanctions by the Russian Foreign Ministry against a number of food items coming out of Europe. Others in Russian business fear that if the belligerent attitude towards Russia goes unchecked, then Russia could find itself fully sanctioned like Iran was. While this is highly unlikely due to the number of U.S. companies doing business there, one Russian official told me that it would be "akin to war" if the U.S. and Europe closed Russia fully from Western capital and energy markets.
Somem Russian companies have benefited from sanctions. Russian agribusiness has been on a tear thanks to counter-sanctions by the Russian Foreign Ministry against a number of food items coming out of Europe. Others in Russian business fear that if the belligerent attitude towards Russia goes unchecked, then Russia could find itself fully sanctioned like Iran was. While this is highly unlikely due to the number of U.S. companies doing business there, one Russian official told me that it would be "akin to war" if the U.S. and Europe closed Russia fully from Western capital and energy markets.
But those in other Russian businesses do fear that if the belligerent attitude towards Russia goes unchecked, then Russia could find itself fully sanctioned like Iran was. It's a worst case scenario at the moment, and far afield.
One Russian official told me that it would be "akin to war" if the U.S. and Europe closed Russia fully from Western capital and energy markets.