Caught in the crossfire

The European Union has imposed two rounds of economic sanctions on Russia since the end of July, targeting key sectors including energy and finance.

The action, which has also been taken by the United States, is to punish Moscow for supporting pro-Russian rebels in eastern Ukraine and the annexation of Crimea. Tensions between the West and Russia were heightened after the crash of Malaysia Airlines Flight MH17 in July in eastern Ukraine, which was allegedly shot down by the separatists. In retaliation, Russia announced a ban on most Western food imports in August.

The Western sanctions are beginning to bite - last week Russian president Vladimir Putin warned in his annual state-of-the nation address of "hard times" ahead, with a recession expected next year amid the sanctions and falling oil prices.

One of the main areas the Western sanctions have targeted is Russia's oil and shale gas industry. But Tom Stocker, a partner in the regulatory team at law firm Pinsent Masons in Edinburgh, who advises companies on the implications of sanctions, said the impact on firms in Scotland of Western sanctions limiting business with Russia had been "significant".

He said: "Personally I am aware of tens of millions of pounds worth of contracts that have not proceeded as a result of the sanctions. Primarily, the companies which are affected are oil and gas service and suppliers. A number of companies had opportunities relating to Arctic oil exploration which can't proceed."

Stocker said companies were also being affected by having to apply for a licence to export British equipment to Russia which is restricted under the sanctions, such as drill pipes, pumps and boring machinery. He said the extra paperwork created had slowed the process of getting an export licence from UK authorities from a matter of days to six to eight weeks.

"I have seen people who have not been able to proceed with business because they couldn't get a licence in time to proceed with that opportunity," he said. "You even need to get a licence to tender, because that can involve providing technical information to the customer. While you are waiting to do that, a company outside of the EU or the US - such as a Chinese or an Indian company - will proceed with the contract and get that opportunity."

Stocker said he would like to see more resources invested in the licensing process, as well as better guidance on what the sanctions actually mean for firms.

He added: "I do think it is unfortunate that businesses have to suffer in these situations. A number of businesses in Aberdeen have been affected, as Russia at the end of the day is one of the big oil and gas markets. There are also companies which have been affected in the central belt, such as civil-engineering businesses which supply parts and machinery and services to oil and gas companies."

Yuri Botiuk, a partner for Pinsent Masons in London who advises firms how to challenge sanctions, described the moves against Russia as "scalpel-like", in trying to target specific industries. In contrast, past sanctions against countries including Iraq, Iran and South Africa were far broader.

"Arctic exploration [by Russia] is something that has been targeted," he said. "There were many projects that were dependent on Western technology to assist them, and a lot of that technology or experience in that is coming out of Aberdeen.

"The unseen cost at present would be all those companies that were gearing up for this. They think, 'Here is a market that is available, let's develop a new whizz-bang bit of kit that is specifically for this Russian market'. They think they will be leading the charge but suddenly the door is closed."

Bryan Buchan, chief executive of Scottish Engineering, which represents manufacturing engineering firms, said: "I have spoken to a number of our member companies which are not dependent on Russia but Russia is a substantial market for them, and in some cases the sanctions have impacted on them directly. If you are operating in the petro-chemical industry, for example, you can be caught in the trap."

He added: "I think most people will endorse taking sanctions against a country which invades a neighbour, but it does have a knock-on effect on our own industry."

Many firms are reluctant to talk about the impact of the sanctions due to concerns over the disclosure of market-sensitive information.

One of the major oil companies reported to have been affected is Shell, which was working with Gazprom Neft, the oil subsidiary of Russian state gas company Gazprom, to develop Russian shale oil.

In October, Gazprom Neft - which has been targeted by the sanctions - said Shell had stopped working on the joint venture.

A spokeswoman for Shell said: "We engage with the relevant authorities and take action to ensure we comply with all applicable sanctions or related measures. Our current business in Russia continues.

"At the same time, there are implications for some of Shell's current and envisaged activities in Russia, and we are working closely with the relevant authorities and our partners to determine what the exact impact of those will be."

Russia was the EU's second-biggest market for food exports - worth around £9 billion a year - before the retaliatory Kremlin ban on imports including fruit, vegetables, meat, fish and dairy products.

One of the industries most at risk is Scottish mackerel fishing, which exports £16m of produce to Russia every year.

Ian McFadden, chairman of the Scottish Pelagic Processors' Association, said the autumn season for mackerel, which has just finished, had been successful due to issues such as falling prices which made it easier to sell, and finding new markets including in Japan and the Far East.

But he said there were concerns for the future, particularly as the Faroe Islands - which are not affected by the Russian ban - had been handed an EU quota allowing them to fish 46,000 tonnes of mackerel in Scottish waters. In effect, this means that while fish caught by Scottish fishermen are forbidden to be sold to Russia, the Faroe Islands can fish in Scottish waters and export their catch to Russia.

McFadden added: "We are going to find it very difficult to get back into the Russian market. We are campaigning at the moment that this swap of quotas should be stopped."

The Scottish Government said it had been assessing the implications of the Russian sanctions on the country's food and drink industry. A spokeswoman added: "We have been working with the [fishing] industry to find new markets for Scottish mackerel including Nigeria, China and Japan.

"All these sanctions are doing is deepening Russian's international isolation, causing more damage to its own economy and people."

George Jamieson, milk policy manager at farming union NFU Scotland, said the Russian ban had added to the problems for an already weak dairy market which had been suffering from falling prices globally, as supply outstripped demand.

As evidence of the byzantine nature of international sanctions, one need look no further than the impact of the ongoing EU-Russia trade embargoes on the Scottish dairy market.

Many EU countries, particularly Denmark, Germany, Ireland and the Baltic states, exported dairy products to Russia before the sanctions began. However, as a result of those sanctions, a glut of dairy products - mostly cheese and butter - built up in Europe as it could no longer be exported. That resulted in the price of milk and dairy products falling, hitting farmers in Scotland and elsewhere.

Jamieson said: "It is going to be tough going for farmers over the next six to 12 months. The Russian ban isn't the cause of the weak market, but it has added to the problems. We are confident ­recovery will come, but Russia made the drop steeper and it is going to make the ­recovery shallower."