Page 47 - bne_March2019_20190306 magazine

bne March 2019
Opinion 47
• In response to the Kremlin’s aggression in Ukraine are, among others, sanctions:
• against 24 FSB agents considered to have been participants in the attack in the Kerch Strait;
• regarding the Russian shipbuilding industry in the event that Russia violates freedom of movement in the Kerch Strait or anywhere else in the world;
• in relation to supporting the development of oil resources in Russia;
• against state-owned energy projects outside of Russia.
The statement also lists other key provisions of the bill. This is support for Nato (it will be possible to leave the alliance only with the support of two thirds of senators) and measures to speed up the transfer of weapons to those Nato countries that depend on Russian weapons.
It is also proposed to create several centres that would help fight Russia and the opponents of the US in areas such
as hybrid and cyber threats. In particular, the National Information Processing Center will have to confront disinformation and other threats from Russia to counter hybrid threats. The Department of Cyberspace and Digital Economy in the State Department will coordinate diplomatic efforts to ensure international cyber security, Internet access and Internet freedom, and so forth. And the Foundation to counter Russian influence will help European countries to resist the intervention of the Kremlin.
Sell-off
The sell-off comes on the back of a lot of recent good news that has pushed Russia’s dollar-denominated Russia Trading System (RTS) index up 14% YTD including: a record $115bn current account surplus in 2018 and a record 2.7% of GDP federal budget surplus. In addition Moody’s returned Russia to “investment grade”, completing the hattrick of investment grade ratings from the leading ratings companies that should have pulled in even more new money. Russian enjoyed inflows of new cash on the back of a return to favour of emerging markets (EM) in general.
The sell-off on February 13 was made worse after New York banks began warning customers to batten down the hatches for new sanctions. Morgan Stanley cut its recommendation on Russia amid “complacency” over new sanctions, adding momentum to the sell-off in assets.
Rout sends ruble down
The rout sent the ruble down the most since December, trimming a rally that’s been the biggest among the world’s major currencies in 2019 YTD. Equities lost 2% on the news and the leading VanEck Vectors Russia ETF dropped 3.4% on the day.
Investors fear a repeat of the April 6 round of sanctions that saw the aluminium producer Rusal and energy holding
EN+ that belong to Russian oligarch and Kremlin insider Oleg Deripaska targeted, along with half a dozen other businessmen, by sanctions. That caused chaos in financial and metal markets as both the company securities and its business are both deeply integrated into the global economy.
Fearing that this round of sanctions could be worse, Morgan Stanley told investors to sell the ruble, load up on credit protection and cut back on local equities to prepare for headwinds from a possible new round of sanctions.
“The consensus within the US legislative class remains broadly aligned against Russia,” according to Ilya Gofshteyn, a strategist at Standard Chartered in New York, as cited by Bloomberg. “The ruble should also underperform because global growth fears will remain a headwind to oil prices,” he said.
A survey of analysts all returned the same answer: hold or sell Russia and wait and see what happens next.
A buying opportunity could present itself. Yong Zhu, a money manager at DuPont Capital in Wilmington, Delaware, told journalists that the fundamentals on Russian bonds were improving on the back of the extraordinary macro results in 2018, but that is more than outweighed by the growing risks.
Making bonds unsellable
Part of the proposed “crushing sanctions” legislation could target Russian sovereign and domestic debt that is widely held by international investors that would make the bonds unsellable and would in effect drive their value to zero if a ban on holding them were imposed. However, more sober observers don't believe the US government will go that far
as too many big US institutional investors already hold this paper, thanks to the rock solid macroeconomic backing of the Russian government set against the high yields they pay.
The ruble is likely to weaken further due to the political uncertainty, but other traders say that the currency has already priced in some of the threat of sanctions as the Central Bank of Russia (CBR) anticipated the coming storm
“Despite the drama, a new round of sanctions will have a limited effect on Russia’s economy”
in September and December when it prophylactically ended its easing cycle and hiked rates to the current 7.75% despite low inflationary pressure in anticipation of more currency volatility after the holiday season was over. Rabobank forecasts that the ruble will weaken to RUB70 per dollar by the end of the year from the current RUB67 to the dollar.
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