EMTA SPECIAL SEMINAR: RUSSIA/UKRAINE: AN UPDATE
Monday, June 23, 2014
245 Park Avenue, Town Hall, 5th Floor
New York City
Recent events involving Russia and Ukraine present a unique challenge to policymakers and to Emerging Markets investors. This EMTA Special Seminar will provide a timely update by a panel composed of market strategists and leading legal practitioners in the area of OFAC negotiations and will cover facts as they exist at the time of presentation.
2:45 p.m. Registration
3:00 p.m. Panel Discussion
Boris Bruck (Societe Generale) – Moderator
John B. Reynolds, III (Davis Polk & Wardwell)
Laura Brank (Dechert LLP)
Danforth Newcomb (Shearman & Sterling)
Arnab Das (Trusted Sources)
Peter Harrell (U.S. Department of State)
5:00 p.m. Cocktail Reception
Additional support provided by Dechert LLP and Trusted Sources.
This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA’s Legal & Compliance Seminars*.
*CLE credit will be available for NY attorneys. This seminar is non-transitional and appropriate for experienced attorneys only. Please click here for details on EMTA’s Financial Hardship Policy.
Registration fee for EMTA Members US$95 / US$695 for non-members.
EMTA Special Seminar: Russia/ Ukraine: An Update
EMTA Panel Reviews Russian Sanctions and Economic Effects
Recent events involving Russia and Ukraine present a unique challenge to policymakers and to Emerging Markets investors. This EMTA Special Seminar “Russia/Ukraine: An Update” on June 23 provided a timely update by a panel composed of market strategists and leading legal practitioners in the area of OFAC negotiations and covered facts as they existed at the time of the presentation. The event, sponsored by Societe Generale at their offices in New York, was followed by a cocktail reception. Additional support was provided by Dechert and Trusted Sources.
Boris Bruck (Societe Generale) moderated the panel, which included John B. Reynolds, III (Davis Polk & Wardwell LLP), Laura Brank (Dechert LLP), Danforth Newcomb (Shearman & Sterling LLP), Arnab Das (Trusted Sources) and Peter Harrell (U.S. Department of State).
Mr. Das presented the economic outlook and financial markets view surrounding the current situation with Russia and Ukraine. He posited that Russia will shrink and is already in a downward trajectory with medium-term economic decline (like Argentina). It has a lower growth rate than other EM countries or even the rest of the world. An insufficient amount of outside investment into the country is aggravated by the crisis (there is currently a 25% risk premium due to the crisis). Its decision to put geo-politics and national security above all else has led to this result.
The U.S. has a great interest in Ukraine that is currently having a liquidity, not an insolvency, problem, and, therefore, Ukraine is priced probably not as low as it should be because it is getting financial support in the form of bridge financing from the U.S., Europe and the IMF. However, as Ukraine becomes less centralized, more locally controlled, more Balkanized, its problem may turn into an insolvency issue.
Mr. Reynolds provided a summary of sanctions and attendant policies that were rapidly evolving in the U.S. and EU. We are at the cusp of an uncertain evolution with calibrated and cautious sanctions and gradual additions of individuals to the restricted list. The Russian economy is much more intertwined with the Western economies (than the U.S.’s nexus with Iran, for instance), but there’s a potential for expansion beyond sectoral sanctions.
Mr. Harrell listed three categories that were perceived differently from a policy perspective: (1) individual officials and separatists in Crimea, responsible for the current violence, (2) Russian officials in the Kremlin or Duma that were instrumental in support of separatism and annexation of Crimea and (3) cronies, business figures not part of the oligarchy, but close to Putin’s inner circle to facilitate his actions. While the EU has not yet sanctioned the third category, the U.S. works to coordinate with the EU (although alignment of restricted lists is not always perfect).
The U.S. sanctions should act as a direct signal to Russia of what the U.S. expects it to do (and not do, like impeding Ukraine elections) so even broader sanctions are not implemented. This perceived threat seems to be working as an active de-escalation is urged (although clearly the recent transfer of tanks to East Ukraine is a disturbing sign). In response to Ms. Brank’s query as to how effective the U.S. government thinks these sanctions are when Russians don’t understand their imposition (as Ukraine is perceived to be in their national interest), Harrell responded that overall the sanctions have had a noticeable impact (despite some rebound in the Russian markets) as Russia has had ratings downgrades, major capital outflows and outlays in reserves to defend the Ruble. The U.S. is not trying to inflict economic pain on Russia for no reason, and Putin is watching closely what EU leadership is requesting. While we can’t necessarily show causation (the credible threat of broader sanctions leading to a better Ukraine election), correlation cannot be ruled out and the U.S. hopes to reverse the illegal occupation of Crimea (the first annexation and occupation of a country since World War II, “unbelievably destructive and unacceptable”) so other nations as well will see the consequences of bad acts.
In response to an audience member’s statement that liberals are moving toward Putin and away from the U.S. and Mr. Bruck’s view that the local population (no matter what the economic or social class) is supporting Putin, Harrell posited that tough sanctions may have costs, but other costs are even higher. Mr. Newcomb remarked that the Cuban sanctions held up the Castro regime, and the same unfortunate result may occur in Russia’s case.
In general, Harrell suggested there are no sanctions prohibiting doing business in Crimea (although there are risks and each case has to be reviewed separately). Bruck’s local color on the ground suggested there have been movements on financial products and contracts. Reynolds suggested that the State Department is using an aggressive approach to sanctions, confident that its pursuit of policy and national security considerations will not engender many lawsuits against the State Department. An audience member suggested that sectoral sanctions and cutting off banks and the Russian economy generally may engender more draconian responses from Russia (such as a confiscation of Western funds), so the State Department should be weighing these risks. Harrell replied that some sanctions may have unintended consequences, and it is valuable to hear from U.S. companies how they are affected by the sanctions, but the U.S. will not be deterred with an amorphous threat of Russian retaliation (such as the prohibition on adoption of Russian children by Westerners, among more dire economic consequences).
Newcomb introduced some of the problems with ambiguous sanctions language relating to counterparties, intermediaries, designated persons, 50% ownership, governing law for subsidiaries, and derivatives and other transactions that may or may not have settled and their termination implications under ISDA and other documents. Brank discussed some of the legal actions taken on the Russian side, the freezing of assets under Russian law and related matters.
Material relating to this Seminar can be found in the June 23 Russia and Ukraine archives of the New Developments area of EMTA’s website ( http://www.emta.org/template.aspx?id=5021).