While it’s probably no surprise that sanctions imposed by the U.S. and EU on Russia after its takeover of Crimea have done some damage to the Russian economy, what might surprise you is the far reach of those sanctions – on countries and businesses outside Russia and its primary industries.
Here’s a look at eight unexpected ways sanctions are making themselves felt on business in the rest of the world.
1. Many businesses in Germany could suffer “catastrophic losses.” Trade between Russia and Germany amounts to approximately 76 billion euros ($104.1 billion) annually.
According to Germany’s foreign trade group, the Federation of German Wholesale, Foreign Trade and Services, there are at least 6,200 businesses doing business with Russia, many substantially involved. Anton Boerner, the head of the trade group, said in a Dortmunder Ruhr Nachrichten interview, “About 6,200 German companies are engaged in Russia, some of them very strongly. For them, economic sanctions would be a real catastrophe.”
2. U.K.-based luxury stores and hotels are taking a hit. Russian tourists flush with cash love to spend in the U.K., but the Ukraine crisis has already caused a substantial drop in receipts at the hotels that cater to those tourists and at the boutiques they frequent when abroad.
According to Global Blue, which processes 80% of all tax-free shopping in the U.K., just in February – before sanctions even hit – the U.K.’s take from Russian spenders fell by 17% from February 2013 (in 2013 such Russian spending rose 16% for the year), thanks to the political situation that has made tourists reluctant to travel and the fall in the ruble. Sanctions that have resulted in Visa and MasterCard cutting off services to four Russian banks so far will undoubtedly further curtail tourist spending sprees, since it will be tougher for them to spend what they have.
3. The G8 is now the G7. With Russia kicked out of the G8, the planned meeting of world leaders that was to take place in Sochi this summer, with Russian President Vladimir Putin as host, has been moved to Brussels. That will take a toll on any immediate financial advantages Putin may have anticipated for Sochi after the conclusion of the Olympics, such as tourism or business investment.
More long term, however, is the potential for greater political turmoil and changing business arrangements as the G7 countries work around Russia and Russia builds closer ties with Asia – something it has already taken action on.
4. Some Canadian companies could stand to lose big if Russian plans to allow Putin to seize and nationalize foreign-owned assets in the country.
Kinross Gold, which has moved into Russia in a big way and owns two mines there, could find itself in a world of hurt if Russia takes any such action. So could auto parts maker Magna International, which does over $400 million in business a year in Russia. Kinross has approached the Canadian government stressing the need to consider Canadian interests in Russia as it decides on further action.
In addition, Bombardier has been negotiating for a joint venture with state-controlled Rostekhnologii (Rostec) to build the Q400 turboprop aircraft in Russia, but discussions have stalled amid uncertainty.
5. Austrian banks carry the most exposure to Russia, and thus the most risk, among banks in Europe, according to Fitch. James Longsdon, managing director, financial institutions, said in a report on the situation that in Europe, Fitch estimates “around 60% of the bank claims on Russia to be from their Russian subsidiaries, so these would be in-country claims.” And among European banks, “Austrian banks have the greatest exposures relative to equity given their expansion into Central and Eastern Europe.”
Among Austrian banks, Raiffeisen Bank International’s Russia exposure, said Fitch, is approximately 20 billion euros ($14.5 billion), which is 2.2 times its Fitch Core Capital; 76% is from its Russian subsidiary and the rest “is cross-border exposure.” If its Ukraine exposure is added in – it postponed the sale of its Ukraine subsidiary – it totals nearly 2.8 times Fitch Core Capital, “which is high.”
6. The Brooklyn Nets of the NBA will be run by a Russian company. Nets owner and Russian billionaire Mikhail Prokhorov has said he will relocate the company that runs the basketball team to Russia as a show of support for Putin, who has called for Russian businessmen to repatriate their assets as a means of working against sanctions.
Prokhorov himself has not been hit by sanctions, so the final result of such a move isn’t yet clear, but the NBA team owner says it is not against any NBA regulations.
7. McDonald’s has shuttered its three Crimean restaurants, citing “the suspension of necessary financial and banking services.” And there’s talk of recriminations in Russia over the move, despite the chain’s disavowal of any political motive.
Vladimir Zhirinovsky, the deputy speaker of the Russian parliament, is calling for the fast food chain’s ouster from Russia. In its 2013 annual report, the chain said that outside of the U.S. and Canada, Russia is one of its top seven markets. So if McDonald’s were forced out of the country, its bottom line would take a sizeable hit.
The chain operates more than 400 restaurants across Russia. Food suppliers within Russia who service McDonald’s outlets would also be hurt by the move, but that might not thwart such an action. Zhirinovsky has said that his Liberal Democratic party plans to picket the country’s McDonald’s outlets.
8. Last and (possibly) least is the possible loss of concerts by Miley Cyrus and Justin Timberlake, among others, to Finnish music fans. Entertainment investors may not realize that the venue where concerts by the two Americans and numerous other artists have been scheduled, the Helsinki Hartwall Arena, is owned by Gennady Timchenko and brothers Arkady and Boris Rotenberg, all of whom appear on the sanctions list.
Not just Cyrus and Timberlake, but other show business luminaries such as Elton John and Peter Gabriel might end up on the outs because of sanctions. Artists with U.S. management could find themselves at the very least unable to promote their Finnish appearances while in the U.S. – if the events don’t get canceled.