- The Washington Times - Monday, May 25, 2015

Russian government officials — and even some outside banking institutions — are sounding increasingly confident that the Russian economy has weathered the storm brought on by U.S. and European sanctions, but some private analysts say the worst is yet to come.

Despite a small rebound in world oil prices, “Russia is not out of the woods yet because the sanctions are going to continue to have an impact,” said Steven Pifer, a senior fellow at the Brookings Institution, a former State Department official who served in Moscow and a former U.S. ambassador to Ukraine.

While the ruble has risen in value during recent weeks and the World Bank and International Monetary Fund have pointed to signs of recovery for Moscow, Mr. Pifer and others say big Russian companies are mired in the throes of a debt crisis that threatens to drain the government of precious currency reserves.

“The ruble has certainly stabilized, and some of the numbers are doing a little better,” Mr. Pifer said, but the bottom line remains that a significant number of major Russian firms are scrambling under sanctions that effectively prevent them from refinancing massive debts with Western lenders.

Ariel Cohen, a senior fellow at the Atlantic Council who also heads the Center for Energy, National Resources and Geopolitics at the Institute for the Analysis of Global Security in Washington, goes further.

“The Russian economy is not improving,” said Mr. Cohen. “State-owned banks have no access to credit in the West, so the government needs to scramble to recapitalize companies that have debt right now.

“The sanctions have worked,” he said. “Certainly, they have not worked enough to cause a full Russian retreat from Ukraine and to rout Mr. Putin externally or even hurt him domestically, but if these sanctions persist, those things may happen by the end of 2016.”

The Obama administration and European Union leaders imposed sanctions on dozens of Russian individuals and companies after Moscow’s annexation of the Crimean Peninsula in March 2014. The restrictions were subsequently ramped up to target certain government-owned banks and corporations as part of an effort to deter further Russian military support for separatist forces in eastern Ukraine.

Russian President Vladimir Putin has sought to downplay the effects of the sanctions. Appearing on an annual call-in TV show in April, he asserted that the nation managed to survive the economic assault from the West.

Although Obama administration officials dismissed the claim as propaganda, economic forecasting by key Western institutions is fueling debate on the matter.

The ruble plunged to record lows against the dollar at the end of 2014, but JPMorgan Chase & Co. recently ranked the ruble as the best-performing currency among emerging markets so far this year. The IMF revised its outlook for the Russian economy, predicting a less-severe downturn than initially thought this year and a “mild recovery” next year. The World Bank pointed to an uptick in global oil prices and noted that inflation appears to be subsiding in Russia.

The “worst-case scenario” for the Russian economy, in the recent words of first Deputy Prime Minister Igor Shuvalov, “has failed to materialize.”

But a U.S. Treasury Department representative told The Washington Times that, despite the rosier forecasts, “the Russian economy is contracting, inflation is well above target and Russian financial market conditions remain poor.”

Mr. Pifer offered a similar view, asserting that companies such as Moscow’s oil giant Rosneft are desperate for cash but have nowhere to obtain it. By some estimates, Russian companies will need to refinance some $100 billion worth of foreign debt over the coming year in order to maintain operations.

“The question,” Mr. Pifer said, “is, where can the Russians get the money?

“There was initially hope in Russia that China would open up its banks. But Chinese banks are really conservative and not oriented in a way to do large lending to Russian companies, so these companies may have to go to the Russian government for refinancing, and that would force the government to draw down reserves.”

By most estimates, Moscow had roughly $510 billion worth of hard currency reserves heading into this year, but that is unlikely to be enough to bail out all of the Russian companies in need.

Leery of lending

Although U.S. and EU sanctions have targeted only a select group of firms — Rosneft among them — Mr. Pifer said the stigma from the sanctions has made Western lenders leery of working with a wide range of firms even if they weren’t targeted by the restrictions.

At the same time, the Russian government reportedly has already burned through some $120 billion of its reserves as part of efforts to shore up the value of the ruble, which plummeted last year.

There is also ambiguity surrounding the value of the reserves the government can dole out.

Since late 2014, Russian companies have been lining up in pursuit of aid from the government’s oil-revenue-financed National Welfare Fund.

The fund, reportedly worth about $83 billion, was supposed to serve as a backstop to Russia’s pension system, but that did not deter Rosneft managers from calling on the Putin government to tap some $49 billion from it to help counter the Western sanctions.

If Rosneft is granted the request, there won’t be much left to bail out anyone else, according to a report by The Moscow Times, which noted that government rules prevent the welfare fund from investing more than 60 percent of its reserves.

In essence, other struggling companies will have to find different pots of government money.

Of course, more money could become available if oil prices continue to rise. Russia is second only to Saudi Arabia as the world’s top oil exporting country.

Mr. Cohen said the initial impact of Western sanctions on Russia last year was augmented significantly by a plummet in global oil prices. Oil went from more than $110 a barrel last June to a low of less than $50 a barrel at the start of this year.

Oil prices have crept back to $60 a barrel in recent months.

“It all depends on the oil price,” said Mr. Cohen. “Russian production costs are high. They need oil north of $65 to $70 in order to have growth and not be afraid of emptying their currency reserves.

“If the oil price sticks around $50, they may run out of reserves at the end of 2015 and there will be dire circumstances,” he said.

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