US Sanctions On Russia May Affect Caspian Economy

A new round of sanctions against Russia, the Caspian region’s largest economy, went into effect August 2 after US President Donald Trump signed into law a bill that had been approved by both houses of the US Congress with veto-proof majorities just a week earlier. While Russia was the target, Caspian states such as Kazakhstan are also expected to be impacted.

Arman Baiganov, an economist at the Astana Best Consulting Group in Kazakhstan, believes that US sanctions against Russia will have ripple effects in the region.

“We have different currencies, but the principles of the influence of economic laws are identical,” he told Kazakhstan’s Tengrinews. “Therefore, we see a direct link on how news of sanctions affects the exchange rates and outweighs the oil factor.”

The Tenge, Kazakhstan’s national currency, fell nearly 10 points against the US dollar, sliding to 335.2 Tenges per $1 USD on August 3, from 325.6 Tenges per dollar just one week earlier.

“Sanctions against Russia will affect Kazakhstan much more than, for example, sanctions against Kazakhstan would affect Russia. After the [2014] sanctions, the Russian ruble has devalued, but Kazakhstan did not immediately [devalue the Tenge]. As a result, Russian goods flooded our market,” Baiganov said, explaining how the two Caspian economies are intertwined.

The US Congress overwhelmingly voted to approve the new bill, which passed the House of Representatives by 419-3 and the Senate by 98-2. The bill also includes sanctions on Iran and North Korea.

The bill is wide-ranging and lists 12 sanctions that can be imposed, include freezing assets such as property, revoking visas and banning exports from the US to those sanctioned. The news measures are seen as strengthening those imposed by Washington after Russia annexed the Crimean peninsula from Ukraine in March 2014.

Specifically, the new law targets people and entities that:

• Invest in or participate in the construction and maintenance of Russian energy pipelines.
• Invest or facilitate the investment of $10 million or more in the privatization of any state-owned asset in a one-year period that could unfairly benefit government officials or their associates.
• Undermine US cyber security on behalf of the Russia government, via activities like computer hacking.
• Conduct “significant" transactions with Russian defense and intelligence agencies.
• Commit or contribute to human rights abuses.
• Commit acts of "significant" corruption.
• Provide support to the Syrian government to acquire arms.

The new law also substantially reduces the US president's power to waive or ease certain sanctions without Congressional approval.

Moscow retaliated following Trump’s signing by ordering the US Mission to Russia to cut its diplomatic personnel by 755 and deprived the US Embassy of using a recreational dacha in Serebryany Bor, a large forest park in northwest Moscow.

The 2014 US sanctions placed on Russia, following the annexation of Crimea, were “aimed to increase Russia’s political isolation as well as the economic costs to Russia, especially in areas of importance to President Putin and those close to him,” according to a statement released by the Obama White House when they were passed.

As a result, Russia faced a number of economic challenges in 2014 and 2015, including capital flight, rapid depreciation of the ruble, exclusion from international capital markets, inflation, and domestic budgetary pressures. Russia’s gross domestic product, or GDP, fell from $2.053 trillion in 2014 to $1.331 trillion in 2015.

Though some experts say these fluctuations were caused by sanctions, other believe that the sharp fall in oil prices in 2014 was the main reason for Moscow’s economic woes.

A report by the US government’s Congressional Research Service stated that the extent to which US and EU sanctions drove the downturn is difficult to disentangle from the impact of a dramatic drop in the price of oil, a major source of export revenue for the Russian government, or economic policy decisions by the Russian government.

While Kazakhstan has been impacted, at least in the short term, not all experts agree that the entire Caspian region will be hit.

Russian political scientist Andrey Epifantsev believes that Azerbaijan’s economy, for example, will not be affected because it is not heavily dependent on Russia.

“The main factor which Azerbaijan’s economy depends on is the world oil and gas prices. In this respect [Azerbaijan’s economy] is similar to that of Russia,” Epifantsev told Sputnik news agency.

Russia’s southern neighbor, Azerbaijan operates a range of fields, including its largest offshore gas field, Shah Deniz II, with an estimated 1.2 trillion cubic meters of natural gas and 240 million tons of gas condensate reserves. Azerbaijani gas from Shah Deniz II is expected to be delivered to the European markets starting in 2020 through the $45 billion mega-pipeline project known as the Southern Gas Corridor (SGC).

The new sanctions may prove to be something of a silver lining for countries like Azerbaijan, and others through which the SGC passes, such as neighboring Georgia. The project was proposed in 2008 after European leaders concluded that the continent cannot rely on Russia for a steady flow of energy supplies. With the news sanctions Russia’s pipeline project Nord Stream 2, set to deliver gas from Vyborg to Greifswald in Germany, may be heavily impacted and divert capital flows to the SGC project instead.