I was wondering what the effects of Russia's falling ruble and the drop of oil export revenue would have on the manufacturing sector.
Due to the lower value of the ruble, manufactured Russian exports would be less expensive and therefore beneficial to any importer to purchase. Demand for Russian exports should increase and mean Russian factories can run at a higher capacity. Except, of course, for the international economic sanctions that have been imposed on Russia.
The US sanctions are laid out in two
Executive Orders issued in March, and an extending order to those two EOs:
Utilizing these Executive Orders, the United States has steadily increased the diplomatic and financial costs of Russia’s aggressive actions towards Ukraine. We have designated a number of Russian and Ukrainian entities, including 14 defense companies and individuals in Putin’s inner circle, as well as imposed targeted sanctions limiting certain financing to six of Russia’s largest banks and four energy companies. We have also suspended credit finance that encourages exports to Russia and financing for economic development projects in Russia, and are now prohibiting the provision, exportation, or reexportation of goods, services (not including financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and that involve five major Russian energy companies.
This means that the sanctions affecting manufacturing are primarily targeted at military and energy producing entities.
Treasury today has also imposed new sanctions and strengthened existing sanctions targeting firms operating in Russia’s defense sector.
Determination about Russia’s Defense and Related Material Sector and Imposition of Sanctions against Rostec. Treasury Secretary Jacob J. Lew today made a determination under E.O. 13662 that persons operating within Russia’s defense and related materiel sector may now be subject to targeted sanctions. Following Secretary Lew’s determination, Treasury issued a new directive that imposes sanctions on Rostec, a major Russian conglomerate that operates in the defense and related materiel sector. Directive 3 pursuant to E.O. 13662 prohibits transactions in, provision of financing for, and other dealings in new debt of greater than 30 days maturity issued by Rostec, and its 50 percent or more owned subsidiaries, effectively cutting it off from U.S. debt financing.
• Rostec is a Russia-based state-owned holding company for Russia’s defense industry. Rostec produces, develops, manufactures, and exports civil, military, and dual-purpose high-technology goods, and is involved in the manufacturing of weapons and military equipment. Rostec-held subsidiaries manufacture and export military products valued in the billions. Treasury designated Rostec’s Director General, Sergei Viktorovich Chemezov, on April 28, 2014, pursuant to E.O. 13661.
Designation of Additional Defense Technology Companies under E.O. 13661. Treasury has also designated and blocked the assets of five Russian defense firms under E.O. 13661 for operating in the arms and related materiel sector in the Russian Federation. The firms designated today under E.O. 13661 include OAO ‘Dolgoprudny Research Production Enterprise,’ Mytishchinski Mashinostroitelny Zavod OAO, Kalinin Machine Plant JSC, Almaz-Antey GSKB, and JSC NIIP. The designated firms are responsible for the production of a range of materiel, from small arms to mortar shells to tanks. As a result of today’s actions under E.O. 13661, any assets of these entities that are within U.S. jurisdiction must be frozen. Additionally, transactions by U.S. persons or within the United States involving these entities are generally prohibited.
• OAO ‘Dolgoprudny Research Production Enterprise’ is a Russia-based company, which is primarily engaged in the production of weapons and ammunition, including the Buk missile system, known in the West as “Gadfly” or SA-11 or SA-17.
• Mytishchinski Mashinostroitelny Zavod, OAO is a Moscow-based company that has produced weaponry and equipment focusing primarily on anti-aircraft missile systems and chassis for tracked military vehicles.
• Kalinin Machine Plant JSC is a Russia-based, state-run company involved in the production of special purpose products such as weapons, ammunition, and combat anti-air missile system facilities for the Ministry of Defense of the Russian Federation. Kalinin Machine Plant JSC produces artillery guns for infantry and anti-air defense and specializes in the production of launchers and anti-air missiles.
• Almaz-Antey GSKB is a Moscow-based subsidiary of the Almaz-Antey Concern, which was designated under E.O. 13661 on July 16, 2014. Almaz-Antey GSKB designs and manufactures air defense systems for the Russian Ministry of Defense.
• JSC NIIP is a Zhukovski-based Russian defense industrial firm owned by the Almaz-Antey Concern. JSC NIIP develops anti-aircraft defense systems, including on-board radar systems for MiG and Sukhoi fighters, and anti-aircraft missile systems for land forces, including the KUB and BUK systems.
The US and EU sanctions seem to be fairly well coordinated and close in substance. The
EU sanctions reported in September are contained in a far more legalese laden document than the US's EOs, but the
BBC reports:
The EU sanctions announced on 12 September targeted Russia's state finances, energy and arms sectors. These are sectors managed by the powerful elite around President Vladimir Putin.
Russia has invoked their own sanctions in response to the EU and US sanctions.
In August the
BBC reported, "Russia is imposing a "full embargo" on food imports from the EU, US and some other Western countries, in response to sanctions over Ukraine."
In December, in response to the plummeting ruble, Russia began to restrict grain exports. (
Bloomburg), "Futures jumped to the highest since May last week after an exporters’ association said Russia denied certificates that grain sellers and buyers need. The government will draw up proposals for export duties on grains in the next 24 hours, Deputy Prime Minister
Arkady Dvorkovich said today. "
Recognizing the complexity of the interlinking economic and commodity pieces of the puzzle, what effect could all of this have on manufacturers?
The Observatory of Economic Complexity is an MIT Media Lab website focused on distributing international trade data in a visual form. The
information for Russia shows that the top export items from Russia are:
The top 20 export items contained no manufactured items that were not a commodity or material. All of the oil based exports are sanctioned and now Russia is self-restricting some grain and food exports with tariffs designed to try and keep those items within Russia and the price stable for their own citizens. The tariffs are generally seen as a overall negative impact to the health of the Russian economy.
Vox has a good summation:
The Russian government's inclination to reduce grain exports does tell us something pretty clear about the Russian economy. The desire to shelter ordinary Russians from higher food prices is completely understandable. But a cheaper currency leading to more robust exports is one of the major channels through which a country is supposed to bounce back from an adverse shock in the global economy.
If the dollar value of Russian oil exports is going to fall, then Russia desperately needs exports of something else to come in and fill the gap. If that "something else" isn't going to be grain, then what's it going to be? The world is not exactly clamoring to get its hands on Russian manufactured goods or to sign up for VKontakte accounts. Curbing wheat exports is a fine idea if the oil price decline is just a passing storm that ends in the near future. But if oil goes into a multi-year period of relative abundance, these kind of measures will only make it harder for the Russian economy to adjust.
There does not seem to be a strong Russian manufacturing export industry that can benefit from the cheaper ruble and aid in Russia's economic recovery. Is there any Russian company that can benefit from this crisis?
