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bne February 2019 Outlooks 2019 I 39
Russia Outlook 2019
bne IntelliNews
Russian politics are dominated by the threat of new “crush- ing” sanctions from the US
that were due in the autumn, but now have been put off until the first quar- ter of 2019. However, the consensus
is new sanctions are on the way in 2019 and their nature will have a large impact on how the year unfolds.
These new sanctions follow on from four rounds of sanctions in 2018, start- ing with the “Kremlin list” in February that was little more than the Forbes Russia rich list. Those were followed by sanctions on Rusal and its owner Oleg Deripaska in April. And finally the Countering America’s Adversar- ies Through Sanctions Act (CAATSA) and Defending Elections from Threats by Establishing Redlines Act (DETER) in the autumn. Apart from the sanc- tions targeting Rusal, none of these sanctions were particularly painful.
The scope of the 2019 sanctions remains unclear, but the Russian government clearly expects the worst and was batten- ing down the hatches in the last months of 2018. Amongst some of the measures it took in the last months of 2018:
• the Central Bank of Russia (CBR) stopped buying cur- rency to build up a war chest;
• the CBR hiked interest rates by 25bp to 7.75% in a surprise move despite the fact that inflation pressure didn't warrant it, as it was shoring up the ruble ahead of instability in the new year;
• the CBR warned banks to find a back-up payment partner in case Russia is cut off from Swift;
• the Duma put contingency plans in place in case Russia is cut
off from the internet; and
• the Ministry of Economy ordered all state-owned companies to switch to Russian software.
By and large Russia is ready for a full scale economic war with the US. It
has built up $470bn in hard currency reserves or 23 months of import cover. The government’s 15% of GDP exter- nal debt is the lowest of any major economy in the world. And Russia sold off most of its US treasury bill holdings. All this makes the Russian govern- ment largely impervious to pressure.
At the same time after four years of self-imposed bans on European agri- cultural products and heavy invest- ment into domestic industry, Russian is becoming increasingly self-sufficient.
Domestically processed foods have already replaced many imports and now the authorities are moving on to replace technology and machin- ery with homegrown alternatives.
Whether the US actually follows through with harsh sanctions that could target Russian sovereign debt and the ruble denominated treasury bonds, the so- called OFZs, remains open to debate. The attempt to sanction Russian alumin- ium producer Rusal and ban investors from owning its stock or debt backfired in spectacular fashion by causing chaos on the international metals markets. The US Treasury Department (USTD) was forced into a humiliating climbdown and the sanctions on Rusal were eventually cancelled altogether in December. Russia is a lot more integrated into the global market than the USTD had realised. And that is doubly true for Russian sovereign debt. That said, the consensus is that
it will get worse before it gets better.
Prima facie international sanctions have not been effective in that their stated goal is to change the Kremlin’s behaviour and that clearly has not hap- pened. However, the sanctions have effectively stymied Russia growth.
CBR governor Elvira Nabiullina has been praised as being the “most conservative
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