Limited Macro Impact From New Sanctions

The latest wave of sanctions by the US against Russia has confirmed our view that the West's response to Russia's alleged actions to destabilise Eastern Ukraine will remain of limited/symbolic nature, absent a military invasion by Russia of mainland Ukraine. However, while the direct economic impact of the measures on Russia's economy will be limited, the impact on long-term investor sentiment, capital flight and rouble volatility will be substantial.

Latest Wave Of Sanctions

On April 28, the US issued asset freezes and visa bans targeting seven individuals from Russian President Vladimir Putin's inner circle, with the most prominent individual involved being state oil company Rosneft's chief executive, Igor Sechin. In addition, the White House's response included a list of 17 companies, which will also be subject to asset freezes, with the US Department of Commerce imposing a ban on "the export, re-export or other foreign transfer of U.S.-origin items to the companies." The EU response, issued on April 29, has been even more underwhelming than the US' as it does not include companies but only individuals from Putin's inner circle, as well as leaders of the separatist movement in Eastern Ukraine.

No Major Rebound
Russia - Main Russian Stock Index MICEX , Weekly

The latest wave of sanctions by the US against Russia has confirmed our view that the West's response to Russia's alleged actions to destabilise Eastern Ukraine will remain of limited/symbolic nature, absent a military invasion by Russia of mainland Ukraine. However, while the direct economic impact of the measures on Russia's economy will be limited, the impact on long-term investor sentiment, capital flight and rouble volatility will be substantial.

Latest Wave Of Sanctions

On April 28, the US issued asset freezes and visa bans targeting seven individuals from Russian President Vladimir Putin's inner circle, with the most prominent individual involved being state oil company Rosneft's chief executive, Igor Sechin. In addition, the White House's response included a list of 17 companies, which will also be subject to asset freezes, with the US Department of Commerce imposing a ban on "the export, re-export or other foreign transfer of U.S.-origin items to the companies." The EU response, issued on April 29, has been even more underwhelming than the US' as it does not include companies but only individuals from Putin's inner circle, as well as leaders of the separatist movement in Eastern Ukraine.

Immediate Implications

All the companies targeted by the recent sanctions are domestically oriented and have no foreign trade linkages, reinforcing our core view of no material impact on Russian trade or cross-border capital flows. Moreover, the sanctions against specific individuals from Putin's circle will have little direct impact on the persons or sway over the Kremlin's foreign policy direction. Tellingly, most of the targeted officials in Moscow have commented that they have no intentions to travel abroad or have no assets abroad, and the only impact is that their partners would now have to travel more often to Russia.

No Major Rebound
Russia - Main Russian Stock Index MICEX , Weekly

Still Medium-Term Bearish

Given our core view that Russia will refrain from invading mainland Ukraine and the West will therefore not impose disruptions to Russia's capital and trade flows, we do not expect to see a dramatic drop in Russia's exports, nor do we expect a wave of foreign multinationals to exit the country. However, portfolio investors will continue to price in heightened political risk for the foreseeable future, which will keep borrowing costs elevated and Russian stock and asset prices depressed. High borrowing costs will further dampen credit demand and tighten credit market liquidity, with subdued credit growth weighing on economic output. In addition, subdued investor sentiment will also underpin rouble weakness, harming fixed investment and keeping inflation elevated, which will dampen consumer purchasing power. As such, we have recently revised out growth forecast for Russia - we forecast real GDP to expand by 1.0% in 2014 and 1.5% in 2015, against our previous forecasts of 1.9% and 2.1% respectively, with risks weighed to the downside ( see 'Crimea Crisis Darkening Russia's Growth Outlook' March 24).

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Related sectors of this article: Political Risk, Foreign Policy
Geography: Russia
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