Sanctions vs Strategy: a sectoral case study of Russia’s sanctions response strategies for preserving the status quo Master of International Business (MIB) Capstone by Parv Aggarwal Advisor: Prof. Patrick Schena August 10, 2020 1 Table of Contents Objective ..................................................................................................................................................................... 5 Introduction ................................................................................................................................................................ 5 Types of Sanctions ....................................................................................................................................................... 6 Timeline of major sanctions ........................................................................................................................................ 7 Russia's Financial Sector Sanctions Strategies ................................................................................................................. 8 Financial Sector Sanctions Context ............................................................................................................................... 8 Impact of Financial Center Sanctions ............................................................................................................................ 8 Financial Sector Strategies Employed by Russian State and Banks ...............................................................................10 Informal capital controls – capital repatriation amnesties .......................................................................................10 Recapitalizing state-owned banks ............................................................................................................................12 Consolidation and russification of smaller banks .....................................................................................................14 Inter-Bank Financing via Correspondent Accounts ...................................................................................................14 Special Purpose Bank and Special Purpose Exchange ...............................................................................................15 Creating domestic payment alternatives to standard international systems ............................................................17 Lobbying – the experience of VTB and Andrei Kostin ...............................................................................................18 End Results .................................................................................................................................................................19 Analysis and Conclusions .............................................................................................................................................19 RDIF: foreign investment diversification in a sanctions grey zone ..................................................................................21 Context and Strategic Overview ..................................................................................................................................21 Sanctions and Activity Restrictions ..............................................................................................................................22 RDIF’s Sanctions Grey Zone Strategies .........................................................................................................................23 Clarification and Confidence-Building: .....................................................................................................................23 Lobbying and Public Relations .................................................................................................................................24 Ownership Separation from VEB .............................................................................................................................25 Leverage from Intertwining with American companies, Diversifying Co-Investments, and Meeting with Trump Admin Representatives ...........................................................................................................................................26 End Result: Weighing the RDIF’s co-investments during the “Sanctions Bill from Hell” hearings. .................................28 Analysis and Conclusions .............................................................................................................................................29 Russia’s Energy Sector Response to Sanctions ...............................................................................................................30 Background .................................................................................................................................................................30 Sanctions and Restrictions...........................................................................................................................................32 Effects of sanctions .....................................................................................................................................................34 Response and Strategies: ............................................................................................................................................37 Russification of Energy Capital : using public funds to bailout energy firms ..............................................................38 Demand Diversification and Consolidation ..............................................................................................................38 2 Joint Ventures and strategic investments ................................................................................................................45 Seeking External financing via Oil Prepayments .......................................................................................................47 Further Pivot to China - Securing Direct Loans, Stake Sales, Joining Silk Road Initiatives...........................................48 Raising further capital via Asset sell off – challenges faced by EDC and Rosneft due to sanctions ............................49 Import substitution .................................................................................................................................................52 “Natural” offsets .....................................................................................................................................................54 Results of strategies ....................................................................................................................................................55 Analysis and Conclusions .............................................................................................................................................58 Mining Sector - Rusal’s Sanctions Strategy .....................................................................................................................61 Background .................................................................................................................................................................61 Sanctions Restrictions .................................................................................................................................................62 Effects of Sanctions .....................................................................................................................................................63 Aluminum Industry Impact ......................................................................................................................................64 Industrial Pressure on Treasury ...................................................................................................................................66 Result of External Pressure ......................................................................................................................................67 Rusal’s sanctions strategy............................................................................................................................................67 Barker Plan .................................................................................................................................................................68 Results: Deadline Extensions .......................................................................................................................................69 End Results .................................................................................................................................................................70 Analysis and Conclusions .............................................................................................................................................73 Fiscal Strategy Response ................................................................................................................................................75 Background .................................................................................................................................................................75 Overview of budget rule ..............................................................................................................................................76