GE-Boeing Among Firms Tracking Russia Sanctions Fallout
Companies with investments in Russia -- such as General Electric Co. (GE) and Boeing Co. (BA) -- are growing concerned as the U.S. prepares to impose tougher sanctions over the crisis in Crimea that may spur retribution against corporate interests.
Almost 100 chief executive officers with the Business Roundtable met in Washington today with Defense Secretary Chuck Hagel. Prior to the meeting, John Engler, the group’s president and former governor of Michigan, said the CEOs are “obviously very concerned about what is happening in Russia.”
“For some companies, it’s a substantial bit of their business,” Engler said in an interview. “They are watching it very intently, trying to understand what will happen and what the next steps will be.”
After the meeting several attendees praised Hagel. “He was very engaging,” said Mike Gregoire, the CEO of CA Technologies (CA), who said Russia and the ramifications of sanctions came up in the meeting. He declined to give any details because it was off-the-record.
U.S.-based companies are the largest source of foreign investment in Russia, primarily in technology and financial services, according to a 2013 report by Ernst & Young. Business interests in the country have been growing after the nation joined the World Trade Organization in 2012, the analysts said in their report.
General Electric, whose GE Capital Aviation Services unit is the world’s largest aircraft leasing company, has 54 airplanes in Russia and is tracking developments closely.
“Hopefully the industry can weather it out, avoid heavy sanctions,” said Norm Liu, chief executive officer of GECAS, General Electric Co.’s aircraft leasing unit in an interview yesterday at an International Society of Transport Aircraft Trading conference in San Diego. “This is a unique situation for all Western businesses.”
If the conflict between President Vladimir Putin and the West is confined to diplomatic circles, he said he’s less concerned. “If it crosses beyond that, it’s a different story,” he said.
For corporations, additional restrictions present two risks: They could inadvertently punish U.S. interests, and the Russians could push back against American companies.
“They are worried about retaliation,” said William Reinsch, president of the National Foreign Trade Council, a Washington-based group that advocates on behalf of companies operating globally. “The Russians have been pretty clear that if we do something to them, they will hit back.”
Reinsch said he’s been getting calls from energy, technology and financial companies concerned about the prospects for their investments in or sales to Russia.
“The Russians have proven themselves very good at doing things that annoy us,” while not harming their economic interests, he said. Because of that, seizure of foreign assets, such as oil-production facilities, is unlikely, he said.
Exxon Mobil Corp. (XOM) Chairman and Chief Executive Officer Rex Tillerson on March 5 said the Irving, Texas-based company wouldn’t take sides in the Russia-Ukraine conflict or any other geopolitical disputes.
Russia is Exxon’s largest exploration prospect outside the company’s home country, and Exxon has also sought permission from Ukrainian authorities to drill beneath the Black Sea off the Crimean coast. Dick Keil, an Exxon spokesman, didn’t immediately return a telephone message left at his office.
Aerospace manufacturers and airlines are concerned about the effect on travel and demand for aircraft if tensions escalate to where global economic growth is stymied, said Kostya Zolotusky, managing director with Boeing Capital, the aircraft financing unit of Chicago-based Boeing Co.
“If last year we were concerned about Iran impacting global GDP, now we’re mindful of the situation between Russia and Ukraine and its potential macro-economic impact,” he said.
A U.S. Treasury official, who asked not to be identified discussing policy talks that are under way, said the agency has heard from American businesses with operations in Russia. He said corporations operating should have known there would be risks investing in the country.
The U.S. and European Union imposed a round of sanctions against Russia on March 17 after Putin recognized Ukraine’s Crimea region as an independent state. U.S. Vice President Joe Biden told reporters in Poland yesterday that Russia “will see additional sanctions” in response to its “land grab.”
Putin yesterday called on the Russian parliament to ratify a treaty to annex Crimea, citing the March 16 referendum there that supported its secession from Ukraine. U.S. President Barack Obama imposed sanctions on seven Russian officials and four Ukrainians, and the EU imposed penalties on 21 Russians and Crimeans in the March 17 moves.
The U.S. Treasury official declined to comment on the next steps, saying only that there will be more coordination in the coming days between the EU and the U.S. on their lists of sanctioned Russian and Crimean officials.
Another risk that could impact businesses is the potential for the U.S. to release some of its strategic oil and gas reserves as a way of punishing Russia, said Bernd Scheifele, the chief executive officer of HeidelbergCement AG (HEI), the world’s third largest cement company.
The Russian economy is dependent on oil and gas revenue, so a U.S. infusion of supply “bursts the Russian bubble very quickly” he said at a news conference today at the company’s headquarters in Heidelberg.
“If the Russian state has no money, then all infrastructure and construction projects come to a standstill, and that will lead to the economy tanking very quickly,” he said.
The U.S. Department of Energy announced last week a test sale of 5 million barrels of oil from the Strategic Petroleum Reserve. White House press secretary Jay Carney said March 12 that the test was required by law to check the distribution system and was unrelated to the situation in Ukraine.
He declined today to answer a question about whether the U.S. is willing to use the reserve as a tool to drive down prices as a way to pressure Russia. “I’m not going to talk speculatively about the SPR,” Carney said.
Two Washington-based trade associations -- the U.S. Chamber of Commerce, which represents 3 million businesses, and the National Association of Manufacturers -- separately stressed the importance of multinational sanctions.
“A go-it-alone approach by the United States could be both economically damaging and ineffective in accomplishing its goals,” Myron Brilliant, head of international affairs at the chamber, said in an e-mail statement. “We will continue to monitor action on this issue as it develops.”
The manufacturers’ group said they are pushing lawmakers for faster approvals of U.S. liquefied natural gas facilities, which could help make Western Europe less dependent on Russian gas. Russia, the world’s largest oil producer, exported $160 billion worth of crude, fuels and gas-based industrial feedstocks to Europe and the U.S. in 2012.
“With an expedited review, the administration would send a strong signal to the Russian Federation, our NATO allies, our trading partners and the rest of the world that energy exports matter and are a critical tool of American foreign policy,” Jay Timmons, president of NAM, said in an e-mail.
The business community is also concerned that the U.S. will eventually impose sanctions, such as those applied to Iran, that limit Russian access to the global financial system, said Blake Marshall, managing director of PBN Hill+Knowlton Strategies in Washington, which represents companies working in Russia.
“If subsequent sanctions start to tie up the banking sector, then that’s a concern,” he said in an interview. “It starts to gum up the system.”
So far, because the U.S. sanctions have been limited, companies are expecting the Russian response to be targeted as well, Marshall said.
The Treasury Department isn’t aware of any moves by Russia to transfer holdings out of the U.S. in response to the sanctions, and any such moves would signal that Putin’s government is reacting to the pressure, the official said.
A liquidation of the Russian government’s U.S. Treasury bill holdings would have no impact on the American market, and would only reflect Russia’s weakness under mounting international pressure, the Treasury official said.
The stake in Treasuries held by investors outside the U.S. rose for a sixth month by 0.5 percent or by $30.7 billion in January, to a record $5.83 trillion, according to Treasury data. Overseas investors held 48.9 percent of the $11.83 trillion in publicly traded U.S. government debt outstanding in January.
China, the largest foreign lender to the U.S., increased its position in Treasuries by $3.5 billion or 0.3 percent to $1.27 trillion. Holdings in Japan, the second-largest overseas lender to the U.S., jumped by $18.9 billion, or 1.6 percent, to $1.2 trillion, Treasury data show.
Russia cut its stake in U.S. government debt by 4.9 percent or $6.8 billion to $131.8 billion, the smallest position since July, according to Treasury data. The country, whose investors have the ninth-largest position in the securities among foreign nations, has averaged $145.8 billion in holdings since 2009.
“Our business in Russia is strong and robust,” Virginia Ferguson, a spokeswoman for the Louisville, Kentucky-based company. “We are focused on our customers, where there is high demand for KFC in Russia, not on the political situation.”
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