Europe Is Getting Soft on Russia. Investors Just Want Clarity

(Bloomberg) -- Almost five years since Russia's military intervention in Ukraine sparked Western sanctions that have helped to smother growth, European governments are losing the appetite for punishing actions against Moscow. That's no solace for investors.

While the European Union shied away from penalizing Russia after a naval clash with Ukraine last month that was condemned by the West, the U.S. is threatening escalating sanctions tied to accusations of Russian meddling in the 2016 presidential elections. The risk of new measures has made it much harder for foreign businesses to work in Russia.

“The most effective sanctions are the ones that aren't entirely clear, because the lack of clarity has a chilling effect on investment,” Frank Schauff, chief executive officer of the Association of European Businesses in Russia, said in an interview. A sanctions law passed by Congress last year that allows for additional steps “will be in place for a long, long time,” he said.

The U.S. and the EU imposed sanctions over Russian President Vladimir Putin's 2014 annexation of Crimea and support for separatists fighting in eastern Ukraine. There's been little progress on implementing a 2015 peace accord to end the conflict in Ukraine's east, giving the EU no scope for easing the penalties. The bloc agreed unanimously last week to prolong the sanctions for another six months. Together with a slide in oil prices, the U.S. and EU measures contributed to a slowdown in Russia's economy and helped deter foreign investment.

Sluggish Growth

With sluggish annual growth of less than 2 percent and the Russian state's expanding role in business, even a recovery in oil prices isn't likely to give a boost to the economy, according to Putin's former finance minister, Alexei Kudrin, who now heads the Audit Chamber that monitors the budget.

For now, major European companies with operations in Russia are hunkered down but are finding it hard to finance expansion because banks are wary of U.S. reprisals. German investment averaged $550 million annually since 2013 compared to $3.6 billion a year from 2007-2012. French companies invested $666 million in the first half of 2018, down from a peak of $2.6 billion in 2010.

“French banks don't finance Franco-Russian projects. Full stop. Not because it's forbidden, but because they're being ultra-cautious,” said Pavel Chinsky, head of the Franco-Russian Chamber of Commerce and Industry. “They all fear repercussions on their U.S. activities,'' he said.

Among the exceptions are retailers, who are able to finance investment themselves, said Chinsky. Leroy Merlin is to open four new mega stores in Siberia in 2019 and France's Danone is in talks to buy Russia's largest baby-food producer, Progress, Kommersant daily reported last month, valuing the deal at $530 million.

Putin told an investor conference in Moscow last month that annual trade with the EU had fallen by almost half from a peak of $450 billion to $236 billion.

There are efforts to bolster business ties. French Economy Minister Bruno Le Maire and his Russian counterpart Maxim Oreshkin agreed on increased cooperation in sectors including energy, nuclear, space and tourism at talks Monday in Paris.

Even so, French President Emmanuel Macron, who attended a showcase annual investment forum in Putin's hometown of St. Petersburg in May together with executives of major French companies, has been unsuccessful in persuading Putin to make concessions on Ukraine and other disputed issues such as Syria, said Nicholas Dungan, a Paris-based senior fellow at the Atlantic Council.

Even if movement on Ukraine enabled the EU to suspend its punitive measures against Russia, U.S. sanctions appear set to broaden, including on the Nord Stream 2 gas pipeline project championed by Germany, European officials say.

“Look at the past, at other countries that have been under sanctions,” said Chinsky of the chamber of commerce. “The U.S. has such a major role with the weight of the dollar and the extra-territoriality of their laws.''

--With assistance from William Horobin, Gregory Viscusi and Patrick Donahue.

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net;Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Tony Halpin

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