Last updated: March 21, 2014 8:18 pm

Russian share prices drop as sanctions bite

Russian President Vladimir Putin (C) signs documents as Sergei Naryshkin (R), speaker of the State Duma, Russia's lower parliament house, and Valentina Matviyenko, head of the Federation Council, look on during a ceremony in Moscow's Kremlin March 21, 2014. Putin signed legislation on Friday that completed the process of absorbing Crimea into Russia, defying Western leaders who say the Black Sea peninsula remains part of Ukraine. REUTERS/Mikhail Klimentyev/RIA Novosti/Kremlin (RUSSIA - Tags: POLITICS TPX IMAGES OF THE DAY) ATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. IT IS DISTRIBUTED, EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS©Reuters

President Vladimir Putin signs laws completing Russia's annexation of Crimea. Sergei Naryshkin, right, speaker of the Duma, and Valentina Matviyenko, head of the Federation Council, witness the signing

President Vladimir Putin’s “inner circle” was feeling the pain of US sanctions on Friday as foreign banks and investors scrambled to reassess their dealings in Russia and investments held by some of the country’s wealthiest oligarchs tumbled in value.

Torbjorn Tornqvist, chief executive of Gunvor, the world’s fourth-largest oil trading house in which the US Treasury claimed Mr Putin had personal investments, said the group had been trading less in the last day as its banks reassessed whether they could continue to lend to it.

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“The last 24 hours have been somewhat disruptive,” Mr Tornqvist said. But, he added, Gunvor “can survive this”.

MasterCard and Visa, meanwhile, suspended payment processing services to the clients of Bank Rossiya, the only company to be named in the US sanctions list. Western Union also said it had suspended service with the bank. The moves came after the US imposed sanctions on 20 individuals and prepared to draw up more sweeping restrictions on sectors of the Russian economy.

Although the sanctions would only directly prohibit business with companies majority-owned by the individuals named, executives and bankers said that they would be cautious in dealing with Russian companies in general. “The banks don’t know whether they want to do business in Russia or not – it’s going to take them several days to figure it out,” said the chief financial officer of one Russian company.

Gunvor was not blacklisted by the US, but its co-founder Gennady Timchenko was among those on the US sanctions list. He sold his stake this week to protect the group, but bond yields for Gunvor, which denies Mr Putin has ever held a stake, still spiked to as much as 12.1 per cent from 7.4 per cent a day earlier.

Novatek, the country’s second-largest gas producer, lost more than $2.5bn in market value after its shares fell by 8 per cent. Mr Timchenko owns a 23 per cent stake in the company.

A central bank official said the sanctions had affected several hundred thousand customers of Bank Rossiya, described by Washington as “the personal bank for senior officials of the Russian Federation”. There were reports of queues at some branches as worried depositors sought to withdraw their savings.

Mr Putin threw his personal weight behind the bank, however, saying he would open an account and had “already instructed the Presidential Administrative Directorate to transfer my pay into this account”.

Alex Brideau, senior analyst, at Eurasia Group, said the sanctions on Bank Rossiya would “send a chill through the Russian banking sector”. “We’re staying clear of any company involved with someone on the sanctions list,” said one UK bond fund manager.

Fitch on Friday put Russia’s sovereign credit rating on negative watch, saying: “US and EU banks and investors may well be reluctant to lend to Russia under the current circumstances.”

On Friday, the Organisation for Security and Co-operation in Europe said it had agreed to send an observer mission to Ukraine.

The US mission to the OSCE said on Twitter that a consensus was reached at a meeting of the group’s 57 members, who include European Union nations, Russia, Ukraine and the US.

Frank-Walter Steinmeier, German foreign minister, said the OSCE’s decision was a step towards de-escalating the crisis in the country.

“This is not yet the end of the crisis but a step that helps to support our de-escalation efforts,” he said. “The situation in Ukraine remains unstable and menacing. For this reason, the [OSCE] observers must take up their work as quickly as possible.”

However, political tensions showed little sign of abating as Dmitry Medvedev, Russia’s prime minister, threatened to raise Ukrainian gas prices and sue the country for $11bn in arrears, hours after Kiev signed a hotly contested integration deal with the EU.

Mr Medvedev, during a meeting with Mr Putin and the rest of Russia’s national security council, also raised the additional $2bn owed by Kiev to Russia’s government-owned energy company Gazprom and another $3bn lent as part of last year’s aborted $15bn Russian bailout of Ukraine.

Mr Putin on Friday signed the laws completing Russia’s annexation of Crimea.

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Letter in response to this article:

For all its size, Russia has a small economy / From Prof Michael Kuczynski

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