Cloud of Uncertainty Lingers Over Business in Russia

The Ukraine crisis is still seen as holding back investment.

Russia has escaped the immediate sanctions threat from the West, but ongoing instability in Ukraine could still keep foreign investors on the sidelines.

"The endgame is still not clear and the economy is still under some pressure, still slowing," said Win Thin, who advises investors as the global head of emerging-market strategy at Brown Brothers Harriman & Co. "There's still too much baggage right now for people to jump back in."

Though the risk that the West would freeze more Russian assets for interfering with Ukraine's presidential elections has passed, U.S. and European leaders are still keeping sanctions on the table as they wait to see how Moscow responds to continued unrest in eastern Ukraine. U.S. Defense Secretary Chuck Hagel said Friday in Singapore that Russia has removed most of the troops along Ukraine's border, a development he called "promising," though he also said thousands of soldiers still remain. The fighting continues, however: Acting President Oleksandr Turchynov said Thursday that pro-Russian rebels shot down a military helicopter near Slovyansk, killing at least 14 people, including a general.

For companies and investors that are waiting for the conflict to die down before they make decisions about what to do next, the continued upheaval means more uncertainty.

Investors moved $50.6 billion out of Russia in the first three months of 2014, more than the $59.7 billion during the whole previous year, according to Bloomberg. That figure includes trade flows, foreign investors pulling out of the country, and Russians moving their money into other currencies because they were worried about the falling value of the ruble. The ruble fell 5.3 percent this year against the dollar, but it has rebounded 2.8 percent in the past month.

"I think those that are seeking clarity are going to be disappointed," said Steven Pifer, a former ambassador to Ukraine and a senior fellow at the Brookings Institution.

"Nobody wants to jump back in too quickly," added Matthew Getz, an attorney with law firm Debevoise & Plimpton in London who advises companies on sanctions compliance. "The fact that it's still being considered is still making people wary."

Getz said that some clients are writing clauses into their loan agreements to allow them to cancel the contracts if the Russian company is sanctioned. And Russian businesses are looking into the possibility of avoiding transactions in U.S. dollars, he said, so that they will be out of reach of any future restrictions coming from Washington. Because the U.S. dollar is the dominant currency for global business, many transactions that don't otherwise involve a U.S. company are routed through American banks, and that point of contact with the U.S. financial system makes the deals subject to Washington's sanctions. Routing the transaction through another country would be one way to avoid them.

"Some companies [have] talked about telling all their counterparties that they're going to do all their transactions in other currencies, like Singapore dollars," Getz said.

The Ukraine crisis will likely continue to be a drag on the Russian economy, which was already hurting even before the West started freezing the assets of powerful Russian oligarchs after the takeover of Crimea. Some Russian start-ups are pulling up stakes and heading to Europe to run their businesses, according to a USA Today report. Yoanna Gouchtchina, for instance, decide to move her software company ZeeRabbit from Moscow to Berlin, after the Crimea invasion.

"Right now it feels like just the beginning of the end of those years where we were building the Russian economy," she told USA Today.

But for some financial firms, the bad news is creating an opportunity to buy stocks on the cheap.

"The crisis will likely have a negative impact on Russia's economy but increasingly attractive valuations provide a good buying opportunity," T. Rowe Price portfolio manager Ulle Adamson said in an email. Adamson, who runs the company's Emerging Europe Fund, said she is maintaining the fund's stake in the Russian stock market and buying more shares of companies she considers strong, while prices are low.

Bill Reinsch, head of the American trade association the National Foreign Trade Council, said companies will be cautious but their degree of caution will depend on the industry.

"The one sector that will probably move quickly is the energy sector," he said. The Financial Times reported Sunday that BP confirmed its commitment to a shale oil deal with Russian state-run company Rosneft at a major economic conference in St. Petersburg that U.S. officials had urged Western companies to boycott. The deal was signed even though the United States sanctioned the head of the Russian company, Igor Sechin. The freezing of Sechin's assets didn't extend to Rosneft.

Washington-based trade lawyer Doug Jacobson said he gets lots of inquiries from clients about Russia, but he doesn't always have an answer for them.

"They're asking me what's going to happen and no one knows," said Jacobson. "That's the worst possible thing for business, is just to have uncertainty."



Gassing Up

The Obama administration is overhauling how it reviews natural gas export projects. That could speed up America's arrival as an LNG exporter.

In a sign that the United States is slowly but surely coming to terms with its role as a potential energy exporter, the Energy Department said Thursday that it will overhaul its sclerotic and oft-criticized process for approving natural gas export projects.

The regulatory change could help streamline the approval process for dozens of gas-export terminals eagerly awaited by countries in Europe and Asia that are desperate to start tapping into cheap supplies of American natural gas. The status of U.S. gas exports has become especially important in the wake of the Russian incursion in Ukraine and Moscow's heavy-handed use of energy exports to cow European countries into line.

Instead of reviewing every proposed gas export project, no matter how realistic or viable, the Energy Department said that it will focus only on projects that have cleared other governmental hurdles, especially environmental reviews and final sign-off from the Federal Energy Regulatory Commission.

The idea is to make Energy Department reviews more efficient, something that many U.S. lawmakers and plenty of European and Asian politicians have requested for years. The regulatory tweak won't open the floodgates to U.S. gas exports anytime soon. The wheels of regulatory approval, like justice, turn slowly. But it is important because when it comes to energy exports, timing matters.

Over the next five years, countries such as Australia, Qatar, Mozambique, and the United States hope to export more natural gas. The clearer the regulatory pathway for U.S. export projects is, the more likely that they can secure financing and line up the needed specialized engineering and construction firms.  

"I have long warned that the United States faces a narrowing window of opportunity to enter the global gas trade," said Alaska's Lisa Murkowski, the Senate Energy Committee's ranking Republican. She said the tweak would help fix a "needlessly confusing" regulatory process.

Department officials also said they will conduct a study of the economic consequences of exporting large volumes of natural gas. A previous study published in 2012 found that gas exports would benefit the economy. However, it analyzed only modest levels of future U.S. gas exports. The announcement is a sign that the Obama administration wants to carefully calibrate how much gas the United States could export without risking a jump in domestic gas prices.

"Today's decision by the Department of Energy to streamline the permit-approval process is a positive step forward to responsibly export America's abundant supply of natural gas," said Senate Energy Committee Chairwoman Mary Landrieu (D-La.), who is an enthusiastic proponent of exporting more energy.

Her predecessor, Oregon Democrat Ron Wyden, has long been wary that exporting too much gas could actually hurt the economy by eroding the manufacturing boom, for example. He welcomes fresh economic analysis.

"I am pleased to see DOE has taken my suggestions to heart and that we will look before we leap," he said in a statement.

The United States is trying to come to grips with a sudden abundance of natural gas, thanks to the revolution in hydraulic fracturing, or fracking. Once destined to be a large importer of natural gas, the country is now preparing to build several multibillion-dollar terminals to export the stuff. But companies cannot export natural gas to countries lacking free trade agreements with the United States without Energy Department approval.

The Energy Department reviews projects on a first-come, first-served basis, only reviewing a few per year. Seven proposals to export liquefied natural gas have received conditional approval but only one, in Louisiana, has final approval. Energy companies criticize the system because the Energy Department spends months reviewing projects that may have little chance of attracting the billions of dollars needed for construction, while more worthy projects languish at the bottom of the list.

"The proposed changes to the manner in which LNG applications are ordered and processed will ensure our process is efficient by prioritizing resources on the more commercially advanced projects," wrote Chris Smith, the department official overseeing the LNG approval process.

Tor Even Mathisen - Flickr