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Worker lay a gas pipe at the construction of the Baltic gas pipeline near Boksitogorsk, 300 km east of St. Petersburg, Russia, Thursday, June 22, 2006. Russia is the biggest single supplier of natural gas to Western Europe. (DMITRY LOVETSKY/AP)
Worker lay a gas pipe at the construction of the Baltic gas pipeline near Boksitogorsk, 300 km east of St. Petersburg, Russia, Thursday, June 22, 2006. Russia is the biggest single supplier of natural gas to Western Europe. (DMITRY LOVETSKY/AP)

Eric Reguly

Business groups fret over possible impact of sanctions in Ukraine crisis Add to ...

John Kerry’s warning that Russia faces economic sanctions unless Russian President Vladimir Putin withdraws his forces from Ukraine had business groups dreading an escalating political crisis that could damage their Russian activities.

Using Sunday news programs to deliver his threat, Mr. Kerry, the U.S. Secretary of State who is to visit Kiev on Tuesday, called Mr. Putin’s deployment of troops in the southern Ukrainian region of Crimea an “incredible act of aggression.” He said Western countries are “prepared to put sanctions in place, they’re prepared to isolate Russia economically.”

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The options he mentioned included visa bans, trade isolation, asset freezes and a boycott of the G8 summit in June in Sochi, site of the Winter Olympics that ended a week ago. Hosting the summit was seen as a victory lap for Mr. Putin after the successful Games.

Some countries are already withdrawing from G8 summit preparatory meetings, including Canada, which has recalled its ambassador from Moscow, and Britain. British Foreign Secretary William Hague said, “The sovereignty and the territorial integrity of Ukraine has been violated and this cannot be the way to conduct international affairs … the United Kingdom will join other G8 countries this week in suspending our co-operation under the G8, which Russia chairs.”

Some U.S. lawmakers proposed that boycotting the G8 wasn’t enough and that Russia should be booted out of the rich countries’ club. “If we were serious about standing up to Putin’s power grab, we would immediately suspend Russian membership in the Group of Eight,” said Texas Republican Senator Ted Cruz.

Canadian companies that do business in Russia were wary about delving into a political debate about Russia’s behaviour in Crimea but, through their umbrella group, the Canada Eurasia Russia Business Association (CERBA), said they hoped not to get caught into the Western backlash against Mr. Putin.

“Russia is an important, high-growth market for Canadian companies,” said Lou Naumovski, the CERBA chairman who is also the director of the Moscow office of Toronto’s Kinross Gold, one of the biggest Canadian investors in Russia. “We would hope for a balanced and measured response from our government that factors in the interests of Canadian businesses active in Russia.”

Kinross said none of its mining activities has been affected by the crisis.

“We are monitoring the situation in Russia and the Ukraine closely,” the company said in a statement. “Our operations are thousands of kilometres from Ukraine in Russia’s far east and have not been affected in any way.”

CERBA members with presences in Russia include Bombardier, Imax, BlackBerry and SNC-Lavalin. In 2012, the amount of direct Canadian investment in Russia was $4.8-billion, up from $1.2-billion in 2010, according to Statistics Canada.

Some analysts doubt that any sanctions would damage Russia. “The threat to the Russian economy from the escalation of the crisis and threats from the West is quite minimal,” Chris Weafer, senior partner at Moscow’s Macro-Advisory, said in a Sunday note. “Eighty per cent of the country’s exports are commodities and the bulk of the rest is defence equipment and grains and other goods not likely to be subject to restrictions.”

The European Union might be wary of imposing more than symbolic sanctions because Russia is the biggest single supplier of natural gas to Western Europe – the main pipelines run through Ukraine and Belarus – and has not shied away from using gas supplies and pricing as a geopolitical tool. In the past decade, Russia has cut or restricted gas supplies to Ukraine and presumably could do the same to Western Europe.

Ukraine’s solvency appears to be the bigger risk as the crisis escalates. The country is back in recession and the corporate bond yields of its biggest companies are soaring, as a sign of waning investor confidence. “The major impact [of the crisis] will potentially be felt in the Ukraine economy which is already reeling from the disruption of the past three months and facing significant short-term pressures,” Mr. Weafer said.

Ukraine has been a ward of the International Monetary Fund for years though it has never been happy with progress on reforms offered by the Kiev government in exchange for the loans. The IMF has frozen loans to Ukraine twice since 2008.

The IMF is to visit Kiev this week in an attempt to negotiate a new loan package. Some economists are speculating that the conditions attached to any loans would be softened, given the country’s economic state.

The IMF’s last loan package, in 2010, to Ukraine was worth $15-billion (U.S.) but was frozen a year later after key reforms went missing.In December, Russia offered Ukraine a similar package but froze the bailout after paying out only $3-billion as the political crisis intensified, and Ukrainian president Viktor Yanukovych fled the country.

Ukraine is in desperate need for funds. The central bank’s currency reserves are dwindling rapidly and, according to Russia’s Commerzbank, the government must make about $6.5-billion (U.S.) in foreign debt payments this year and requires another $6.5-billion to cover a current account deficit.

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