U.S. Sanctions May Hit Debt Trading and the Economy
After the U.S. bill toughening sanctions on Russia passed Congress by a huge majority, President Donald Trump grudgingly signed it, in August. The law codifies existing financial and sectoral sanctions, and introduces new provisions that open the possibility of U.S. sanctions against companies involved with Russian energy export pipelines, with Nord Stream 2 specifically mentioned.Sectoral sanctions are expected to affect transport, shipbuilding and metals concerns. The law also hardens financial sanctions on the corporate sector, and allows for the targeting Russian government debt.
We think the short-term impact of these new sanctions on the Russian economy will be limited -- and current market reaction confirms this view. A stronger economy in 2017 will help cushion any immediate negative effects. Russia’s GDP expanded 2.5% y/y in Q2 2017 – and, sanctions notwithstanding, we maintain our 2% growth forecast for the year.
The most potentially harmful short-term risk is a restriction on U.S. persons trading Russian government debt. About 31% of OFZ is held by non-residents, and the restriction may lead to a heavy sell-off. Yet, so far, market reaction to this risk has been muted.
Sanctions won’t alter the CBR monetary policy regime, and we do not see the sanctions driving a change in monetary policy stance.
Yet the sanctions will hurt the Russian economy in the longer run. The law also complicates the lifting of sanctions, even under the most optimistic scenario. It increases the long-term risk premium for Russian borrowers, and makes more difficult any form of cooperation with Western companies. In this sense, the new measure enhances the likelihood of the Russian economy stalling at 1%-2% growth rates.
Now read on...
Register to sample a report