Fresh U.S. sanctions announced in August could damage foreign investment in the Russian metals and mining sector, Christopher Weafer, senior partner at Macro-Advisory Ltd., told S&P Global Market Intelligence on Oct. 11 on the sidelines of the MINEX Russia conference in Moscow.
Although the Russian economy quickly adapted to the first round of U.S. sanctions in 2014, the announcement of the inclusion of state Russian mining companies in the new sanctions list has made foreign investors wary.
Weafer said the latest move by the U.S. government has "raised a red flag" for industry players and there is the potential for escalation.
The fact that Russian Railways was included in the list could also have a knock-on effect on the Russian metals and mining industry, according to Weafer, although it remains to be seen what form the penalties will take.
"The latest sanctions have introduced the idea of secondary sanctions," he said in a speech at the conference. "We're finding that companies are having to account a lot more for their internal compliance and their legal departments."
Secondary sanctions stipulate that if a company deals with another company that, in turn, does business with a sanctioned organization, it could be penalized.
For now, Russia will refrain from making a tit-for-tat response until it becomes clear how the sanctions will be implemented and which individuals and companies will be included. In the meantime, there is a real effort on the part of the Russians to engage with other countries such as Saudi Arabia and China.
Overall, the largest impact from the restrictions implemented by the U.S. government on Russian companies and individuals is the climate of uncertainty, Weafer said.
"There are western investors who are not legally prohibited from investing in Russia and a lot of them just choose not to do it because they are not sure or because there is a potential risk of further sanctions," he said. "So on a voluntary basis, they just have decided to stay away from Russia."
Previous damage to the Russian economy had been marginal and the situation had been improving with more foreign investment coming into Russia, but Weafer said the latest round of sanctions could lead to a reversal.