The impact on countries & companies of sanctions against Russia - Assignment Example

The impact on countries & companies of sanctions against Russia Table of Contents The effect of Russia sanctions 3 Economic and Political scenarioin Russia 4 Stakeholder Range 6 Objectives of the government 7 Reference List 9 Appendix 10 The effect of Russia sanctions It is essential for companies to be aware of various sanction regimes while operating globally. The companies should not only be informed about the consequences, but they should also design measures which would help them to comply with such regimes. The literature suggests that the use of sanctions increases risk in a country. Several studies have indicated that sanctions in most cases fail to bring the desired outcome (Spalding, 2010). Sanctions on Russia were imposed to solve conflicts by using alternative strategies other than military actions. Russia’s economic and political conditions were aggravated with the sanctions (Simes, 2007). Sanctions have always been an instrument of economic negotiation over the years. International trade has been restricted and globalizations of business operations have been hindered as a result of the implementation of sanctions. Free trade is not supported by sanctions and thus, the effect of globalization on a country’s economical conditions is found to be absent. In Russia, sanctions have brought vague and irreparable consequences. Sanctions are generally implemented to curb corrupt government practices (Drezner, 2003). Mainly the economic and political climate was affected due to the imposition of sanctions. There had been several negative effects which not only affected Russia, but also other countries like the United States and the European Union were affected. Improvements in the situations have been experienced, but the change has not been significant. Many companies in the United States who had investment plans in Russia had to suffer losses due to restrictions on business activities. This in turn, had caused severe financial crisis in Russia as major industries which depended on international investment had to be closed down due to absence of sufficient capital and other resources. For instance, many Russian companies dealing with oil have lost investors due to abandonment of cooperation from global oil companies like British Petroleum and Exxon Mobil Corporation. Companies who exported to the Russian companies faced a grave economic downturn. The United States also suffered and especially the agricultural sector was affected as Russia was one of the main importers of the United States food products. There was drain of capital from Russia and this happened in a rapid rate. Technological advancements also suffered. Russia stopped its supply of sophisticated resources that helped NASA in various advanced programs. There were also severe implications on the European Union due to the sanctions against Russia. Political risks were increased and this caused more problems in Europe. The debt crisis that was prevailing in the country became even more serious as many companies who had their market in Russia suffered heavy losses and eventually collapsed (Spanjer, 2007). Economic and Political scenario in Russia The political and economical conditions in Russia were linked to each other. There was a presence of duality in the situations. Russia’s invasion in the Crimean peninsula of Ukraine had major consequences on its economic and political conditions. The tactics taken by Russia are illustrated in the figure 1 of Appendix. The political scenario was further affected by Ukraine’s consequent inclusion into Russia. Investors have become skeptical and there is a growing anxiety in the markets that has negatively affected foreign investment. There is lack of capital in the country. There is a sharp rise in outflow of capital from the country. The overall economic condition and political has deteriorated with time and there have been negligible signs of improvement in the current economic conditions (Shleifer and Treisman, 2000). The sanctions imposed by the United States and the European Union also had several implications on the economic conditions and political conditions of Russia. The sanctions had even more significant political impacts on certain individuals in Russia, Crimea and Ukraine. These specific individuals had direct or indirect involvement with the political activities and the consequent adversity over Crimea (Stoner-Weiss, 2002). The value of financial assets as a result experienced a sharp fall. There was freezing in the real estate and property transactions. Business transactions could not be carried on smoothly due to the absence of foreign investors. This was due to the fact that, the investors found it difficult to make travel plans to Russia as there were strict restrictions related to Visa application. The sanctions were implemented to bring some positive outcomes in Russia. However, there were no direct results encountered. It can be expected that with time, more sanctions would be imposed particularly by the European Union. This may instigate some change in the business and investment environment in Russia. It has been noticed recently that the credit rating of Russia were reduced to a negative outlook by the various credit rating companies like Fitch, S&P and Moody. The fall in ratings have also discouraged foreign investors from investing in Russia as the ratings suggest that investment would not give expected return in the long run. Thus, investment conditions became grave and this resulted in political war. Restrictions became stricter and political situation led to turmoil in the country (Shleifer and Treisman, 2000). The business and investment environment improved substantially with the crumple of the USSR. The huge consumer market of Russia attracted investor. The disposable income of the population showed a rising trend and consumer’s purchasing power increased. Russia also had a cheap and highly skilled labor force. Investors were also attracted by the vast reserve of resources of Russia. However, even with such favorable conditions, Russia faced severe administrative, legislative and political challenges. Corruption prevailed at a high rate and the legislative condition suffered deficiencies. Foreign investors were barred from entering the Russian market due to the presence of regional disparities (Shleifer and Treisman, 2000). Stakeholder Range The current situation in Russia has an impact on its existing stakeholders. The stakeholders have become skeptical about the present scenario and thus, this had led to a change in their relationship with the country. The economic sanctions generally impact the financial and international trading position of Russia and as a result, investments in both ways are affected in the process. The foreign investors who have their business operations in Russia will be severely affected (Wright, et al, 2003). The Russian companies who have their operations in any foreign country will also get affected in return. Facts and figures suggest that both external and internal stakeholders are affected due to the emergency situation prevailing in the country. The stakeholders who operate internally are the suppliers and employees carrying business operations and the stakeholders who operate externally comprise of the foreign and domestic investors, government and the customers associated with the business activities. Free trade is significantly barred by the imposition of sanctions (Smirnova, et al, 2009). This has affected not only the Russian companies but also the companies in America and Europe. This can be supported by the fact that, many German companies were severely affected due to Russian sanctions as they were highly dependent on the energy sector of Russia this is supported by the figure 2 in the appendix. Similarly, Russian stakeholder in Italy also got affected by the sanctions (Holtbrügge and Puck, 2009). Various study of economic theory suggests that consumer’s welfare is affected by the economic sanctions. The consumers are eventually not benefitted from any type of sanctions in the long run. If the imposition of sanctions restricts the export and import of necessary items, then the consumers are bound to face threats that arise in the form of high product price, product hoarding and product scarcity. There would also be a fall in the product quality. Sanctions would also lead to abnormal increase in rates of several consumer products as the stock of products in the home country would fall due to ban in imports. Several financial institutions like the banks and other lending institutions would be affected negatively (Wright, et al, 2003). In the broader sense of the term, stakeholders of Russia comprises of a wide range. It not only includes the consumers and the general public of the country but also includes shareholders and financiers who channel capital to the country. Russia’s trade relations with the United States has suffered massively and this has had severe repercussion on both the countries people and administration. Russian companies found it difficult to raise capital and thus expansion plans were not carried on effectively. Investment related to the energy sector in Russia will suffer further drawbacks if terms of sanctions continue to be enhanced. Thus, it can be seen that stakeholders ranging from consumers to investors get affected adversely due to the sanctions (Smirnova, et al, 2009). Objectives of the government The sanctions are imposed on Russia with the aim of creating a transparent administrative situation in the country. The purpose is to ensure that the government discontinues the use of unfair means in its legislative functions. The United States have taken steps to penalize Russia due to the turmoil it created in Ukraine. This has led to the impositions of sanctions, wherein Russia’s ill practices can be impeded without the use of military forces. Policies at the United States always lay emphasis on economic sanctions during any emergency situation as these sanctions can help them to justify their actions on ethical grounds (McCarthy and Puffer, 2002). The same rationale holds for the government in the European Union. However, in case of the Europe Union, Russia has taken counter actions and imposed restrictions on European business activities as the trade relations between Russia and Europe are moderately stronger. This has been supported by the figure 3 in the appendix which makes imposition of sanction crucial for both the nations concerned. The effect of sanctions has not generated expected results. The sanctions would be effective only if there is cooperation and collaboration in business activities among the nations. The government in Russia is concerned about the weak growth trends. The government should design policies to combat such restrictions from other nations. The Russian Government should change its outlook towards the actions taken in Ukraine in the coming five years. The government should emphasis on portfolio diversification in not only the energy sector, but also other financial sectors. The government should rely on peaceful negotiations with the superpowers like Europe and the United States to sustain growth in the long run. Therefore, it can be expected that intensive negotiations would be a part of any significant transactions to enhance conditions in the associated nations. The government should strategically take steps for maintaining a balance economic and political climate in Russia that would encourage foreign investment in the long run (Weitz, 2006). The business environment should be enhanced and trade situations have to be improved. Restrictions on free trade have to be removed so that imports and exports are encouraged. These are the principal steps that the Russian government should seek to achieve in the next five years in order to ensure balanced growth trends in the economy (Ivanov, 2002). Reference List Drezner, D. W., 2003. The hidden hand of economic coercion. International Organization, 57(03), pp. 643-659. Holtbrügge, D. and Puck, J. F., 2009. Stakeholder networks of foreign investors in Russia: An empirical study among German firms. Journal for East European Management Studies, pp. 369-394. Ivanov, I. S., 2002. The new Russian diplomacy. Washington: Nixon Center. McCarthy, D. and Puffer, S., 2002. Corporate Governance in Russia: towards a European, US, or Russian Model?. European Management Journal, 20(6), pp. 630-640. Shleifer, A., and Treisman, D., 2000. Without a map: Political tactics and economic reform in Russia. Massachusetts: MIT Press. Simes, D. K., 2007. Losing Russia: The costs of renewed confrontation. Foreign Affairs, pp.36-52. Smirnova, M. M., Podmetina, D., Vaatanen, J. and Kouchtch, S., 2009. Key stakeholders interaction as a factor of product innovation: the case of Russia. International Journal of Technology Marketing, 4(2), pp. 230-247. Spalding, A. B., 2010. Unwitting sanctions: understanding anti-bribery legislation as economic sanctions against emerging markets. Fla. L. Rev., 62, pp. 351. Spanjer, A., 2007. Russian gas price reform and the EU–Russia gas relationship: Incentives, consequences and European security of supply. Energy Policy, 35(5), pp. 2889-2898. Stoner-Weiss, K., 2002. Local heroes: The political economy of Russian regional governance. New Jersey: Princeton University Press. Weitz, R., 2006. Averting a new great game in central Asia. Washington Quarterly, 29(3), pp. 155-167. Wright, M., Filatotchev, I., Buck, T.and Bishop, K., 2003. Is stakeholder corporate governance appropriate in Russia?. Journal of Management and Governance, 7(3), pp. 263-290. Appendix Figure 1: Russia Sanctions Figure 2: Europes dependence on Russia for oil Figure 3: Economic ties of Europe and Russia Read More