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Western Sanctions On Russia Doing More Harm To West?

Channel One

Channel One

Russian state television broadcaster

Russian industry has practically not suffered from the introduction of Western sanctions. Moreover, American companies, especially oil companies have suffered serious losses.

...some U.S. firms impacted, but Putin himself has admitted sanctions hurt Russia.

In its May 11 broadcast, state broadcaster Channel One selectively cited a May 8, 2017 article in the Wall Street Journal that reported only on Russian oil companies, not Russian industry overall, and pointed out only that Exxon Mobil Corp was suffering, but not other big Western energy companies. Channel One simply left these facts out of its report.

The Wall Street Journal also noted that due to the uneven application of sanctions, European companies continued to invest in Russian companies under penalty.

Channel One correctly cited Wall Street Journal’s point that Exxon Mobil was the one company hurt by U.S. sanctions targeting Russia. Exxon Mobil applied for a waiver from the sanctions in 2015, saying that it would otherwise lose its drilling rights under a contract with Rosneft. But the U.S. Treasury Department recently turned down that request. This means that production of new oil in the Arctic and Siberia has been delayed indefinitely.

Last year, Exxon suffered a 50% loss in earnings, mainly due to the fall in the price of oil -- not Russian sanctions -- but still had earnings of $7.8 billion.

Even so, Exxon has lost not just prospective earnings but has suffered a reduction of existing revenue. As of early 2015, seven months into the sanctions imposed in 2014, Exxon was estimated to have lost $1 billion from its Russian operations. The sanctions forced Exxon to shelve its Arctic drilling plans and it began to lose from ongoing Russian projects, including its flagship project Sakhalin-1. Nevertheless, it reported a profit of $1.7 billion in the second quarter of that year.

But other Western companies continued to profit from Russian business despite sanctions, according to the Wall Street Journal article. BP, which was allowed to keep its nearly 20% stake in Rosneft, gained $590 million of its net earnings in 2016 from this ownership. Italy's Eni is planning to drill a Black Sea well later this year in partnership with Rosneft ( unlike U.S. sanctions, the EU sanctions allowed pre-existing partnerships to continue). Norway's Statoil, France's Total and Royal Dutch Shell have all proceeded with partnerships; Royal Dutch Shell and four other European companies are providing half of the $10 billion in financing for Nord Stream 2, a Russian natural gas pipeline to Germany. The project was opposed by the EU, but Brussels was ultimately unable to block it.

Still, despite these investments, Western sanctions have unquestionably had an effect on the Russian economy.

A study by the U.S. State Department used in a briefing in September 2016 and published in December 2016 said two years of sanctions at that point had caused a loss of one third of the operating profit of Russian companies targeted, half of their assets and one third of their staff.

Due to the fall in oil prices as well as the effect of continued sanctions, Russia has been forced to raid its sovereign wealth fund to cover its budget deficit.

To be sure, a February 2017 study by the Congressional Research Service noted the difficulty of distinguishing the effect of falling oil prices from the impact of sanctions, and commented that Russia’s economy began stabilizing last year after the initial blow of the sanctions. Even so, this study also cited Russia’s own Finance Minister Anton Siluanov in 2014, who said the sanctions had cost the Russian economy $40 billion or 2% of its GDP compared to $90-$100 billion (4%-5% of its GDP).

And in fact, President Vladimir Putin himself admitted in an interview with build in January 2016, "the sanctions are severely harming Russia."

Then in October 2016 at VTB Capital's Russia Calling investment forum, Putin acknowledged, "Sanctions are hurting us. We hear that they are not a problem really, but they are, particularly with technology transfers in oil and gas."