Moscow-on-Thames: London bears the brunt of EU sanctions

The City of London, a banking powerhouse and playground for Russia’s rich, will likely bear the brunt of Europe’s concerted efforts to punish Putin.

On Thursday the European Union expanded existing sanctions against the Russian state by targeting its defense, energy and financial sectors. The tough new package passed under EU Council Regulation No. 833/2014 bans new arms exports, the sales of oil-drilling equipment and restricts Russian access to European capital markets.

In a move that is expected to have the biggest impact on the Russian economy the EU Council confirmed that five of Russia’s largest banks, Sberbak, Gazprombank, Rosselkhozbank, VEB and VTB will be prohibited from buying or selling new bonds, equity or similar financial instruments with a maturity exceeding 90 days.

It is estimated that roughly 30% of Russia’s banking sector assets are now constrained by sanctions.

The newly invigorated impetus comes as the EU seeks to tighten the screws on the Kremlin over its alleged support for pro-Russian rebels and its failure to allow international investigators access to the MH17 crash site. Intelligence reports indicate that Donetsk rebels were responsible for the downing of a civilian passenger flight using Russian supplied Buk missile launchers.

Whilst EU officials have assuaged that sanctions aim to inflict maximum pain on Russia and minimum pain on the EU, Foreign Secretary Philip Hammond conceded that the UK economy would feel the pain, telling Sky News: ‘you can’t make an omelette without breaking eggs’.

London has long reined as the favourite haunt of Russian business. In 2013, the City along with other European financial capitals benefited from £5.9 billion in bonds issued by Russian state-owned financial institutions.

The London Stock Exchange (LSE) has also become one of the favourite global stock exchanges among Russian companies, listing its two largest banks Sberbank and VTB. The former successfully raised £3.2 billion in 2012 by offloading 7.6% of its capital, 90% of which was placed in London in the form of global depositary shares. Such sales would now fall foul of EU sanctions.

London’s financial markets are no stranger to volatile reactions, and the latest round of sanctions proves no exception. A leaked EU policy paper acknowledged that ‘adverse effects could materialise in loss of revenue for operators, depressed value of existing securities, loss of market positions...and risks of default on outstanding obligations from targeted institutions’.

Shares in Sberbank fell 1.7% while VTB dropped sharly by 4.3% in reaction to the news.

As the markets teeter the champagne fountains run dry. According to Global Blue, an expert on foreign traveller’s shopping and spending habits, retail spending by Russian visitors to the UK declined 22 percent from a year earlier.

It shows up in all sorts of venues: “We’re seeing a lot less Russian surnames on the booking sheet,” Michael Evans, creative director of a nightclub called Mahiki, told Bloomberg.

From exotic goods to luxury cars Russian spending power has plunged and London is paying the price.

Dubbed ‘Moscow-on-Thames’, Russian oligarchs have long buttressed the London residential market by snapping up luxury homes in the districts of Belgravia, Knightsbridge, and Kensington and Chelsea. Yet London’s safe haven status may be no more.

Lyubov Jones told OPP connect that the well-to-do may look elsewhere; ‘Switzerland has recently opened the doors for rich Russian’s...In light of that, one has to question whether the impact of sanctions will simply mean that Russian money will move to other European countries’.

As Russia feels the impact of further economic sanctions - the toughest since the Cold War – the City of London is unlikely to escape unscathed from the broader fallout. Collateral damage to London’s financial and property markets however may be a small price to pay to make Putin blink.