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The reaction to the imposed US sanctions on Russia

Recently the US led by Trump’s administration imposed new sanctions on seven of Russia’s richest men and 17 top government officials.

The sanctions are designed to reprimand some of Russia’s richest industrialists, who seem to be benefitting via their pockets through Putin’s increasingly authoritarian government.

Effectively, the oligarchs are prevented to travel to the United States, do business or even open a bank account with any major company or bank in the US It also limits foreign individuals from permitting transactions on their behalf.

The effects on financial markets

Just a week ago, fund managers were, rightly so, given the positive outlook for energy prices, overweight Russia more than any other emerging market.

Interestingly enough, more than 70 per cent of emerging market local currency government bond funds were overweight in Russian debt, according to Morgan Stanley, while 95 per cent of them were overweight the rouble.

The news of US sanctions on the country and the tension created between both countries on how Russia is supporting the Syrian regime, caused disarray, leading the rouble to sink to a 16-month low in intraday trading. In fact, Nimrod Mevorach, analyst at Credit Suisse Group AG, wrote that the rouble sell-off went too far, although the currency is unlikely to strengthen substantially.

Consequently, yields on government rouble-denominated debt due in January 2028 increased 27 basis points to 7.59 per cent last Tuesday. The sell-off led the government to postpone an issuance, while Sberbank, one of the largest Russian banks, postponed a local bond sale due to the unfavourable market condition.

Moreover, the Russian stock index in Moscow fell by 10 per cent in just one day, the largest single-day drop in the last several years, sweeping an estimated $12 billion off the market capitalisation of major corporations in the index.

That said, last Wednesday, the rouble snapped back from losses after traders sought the overselling in the Russian currency.

Despite the negative sentiment, oil traders were unnerved by the news of the sanctions to the extent that the price of Brent was boosted to a more than a three-year high based on the fear of supply disruption. It is known that energy prices and the Russian rouble are highly correlated and in this regard, the tensions have imposed fear, which led to supportive energy prices.

The fixed income market was not immune to the selling pressure, with hard currency Russian bonds declining on average by 8 per cent. In my view, this was an overreaction when considering that not all companies were hit by the sanctions and thus can still access the debt market.

Moving forward, although Russia’s market was hit significantly, the country can afford to contain the damage - it has $458 billion of foreign reserves, the highest level since 2014. Head of Russia’s central bank, Elvira Nabiullina, said that the bank would not hesitate to sell dollars if needed. In addition, it can also use interest rates to offset any increase in inflation.

In a larger sense, the initial sanctions are expected to have a limited overall effect after the initial shock wears off, because they ultimately targeted just a handful of companies. Should the US reconsider new sanctions for Russia related to Syria, a more intensive volatile market would be seen. However, we are of the view that the government has the necessary tools to intervene and help out if need be. The recent volatility might have indeed created opportunities to hold an allocation to Russian assets.

Disclaimer:
This article was issued by Maria Fenech, intern at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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