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Successful sanctions?

Home / Hermes EOS Blog / Successful sanctions?

With tensions around the world seemingly on the up, geopolitical risks have become more relevant to investors and companies. So far, the effects of the Ukraine crisis have been confined to the affected countries and their immediate neighbours. And the turmoil in the Middle East has had little influence on the level or volatility of energy prices.

But are the sanctions imposed as a result of the Ukraine crisis beginning to bite? Do they impact not only on the macro-economy but also affect the companies operating in the region?

Sanctions have emerged as the favoured policy tool of many international actors to coerce states into changing their behaviour. Diplomacy can be ineffective and military action pricey and the lack of plausible alternatives makes sanctions look like an attractive option for policymakers. However, in most cases – as several studies point out – sanctions are ineffective. To avoid disappointing results, the sanctions doctrine seems to have been adapted to create a new formula described as ‘targeted’ sanctions. The idea behind this is to avoid indiscriminate measures that might hurt the general population of a country more than its leadership.

Targeted sanctions
The conflict in Ukraine prompted a number of governments to issue sanctions against individuals and businesses from Russia and Ukraine. The sanctions approved by the US, the EU and other countries as well as international organisations largely focus on technologies and services related to a new generation of upstream oil projects, such as Arctic, deepwater and shale. They also restrict Russia’s access to capital markets. Russia meanwhile responded with its own sanctions against a number of countries, including a ban on food imports from the EU, the US, Australia, Canada and Norway.

The conflict has also highlighted the dependency of European energy markets on Russian gas. This is reflected in the care Western governments have taken to protect the gas sector from sanctions. Although recognised by the EU as one of its biggest strategic weaknesses, there will be limited scope in the next five years to significantly reduce this dependency on Russian gas.

In combination with the sanctions, counter-sanctions and fear of further escalation, the geopolitical tensions are amplifying uncertainty, depressing confidence and halting investment in Russia. The country’s economy is teetering on the verge of recession. Inflation is on the rise, mostly due to an increase in food prices caused by the import restrictions and the collapse of the rouble. Russian banks have been cut from Western capital markets and the price of oil – Russia’s most important export commodity – has plunged, albeit unrelated to the sanctions.

Despite their to date negligible effect on current Russian oil production, Western sanctions on equipment for shale oil and deep water drilling will affect longer-term prospects. Global oil majors have the highest exposure to the new generation of upstream projects. ExxonMobil, for example, wound down its Arctic operations in October as a result of the sanctions. However, as most multinationals pursue a policy of geographic diversification, they have proved better than expected at absorbing the geopolitical risks. This is also illustrated by companies with a traditionally large exposure to the Russian market such as Carlsberg, Danone, Société Générale or Total, which have significantly reduced their risk by building a geographically diverse portfolio of assets.

But despite this resilience, it is paramount to continue our engagement with these companies on longer-term geopolitical risk planning and mitigation. This is particularly crucial in today’s uncertain world with its high degree of geopolitical risk.

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Roland Bosch Roland Bosch is sector lead for financial services and responsible for corporate engagements in Europe and the US. He engages with corporate boards on relevant strategic, governance, social and environmental issues to foster long-term sustainable value creation. Prior to joining Hermes EOS, he worked as an investment manager at F&C Asset Management, where he was responsible for managing institutional equity portfolios, as well as providing investment analysis and recommendations. Before that, Roland was based in the Netherlands, working as an investment manager for insurance group Achmea and as an equity analyst at HSBC. Roland is a certified investment analyst (RBA), EFFAS financial analyst and holds a degree in Business Economics from Groningen University. Roland is fluent in Dutch and English, with a good working knowledge of German and French.
Read all articles by Roland Bosch

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