New US sanctions to weigh on Russia’s recovery

Jack Stubbs and Polina Nikolskaya -

An escalation in US sanctions against Moscow risks derailing a fragile recovery in Russia’s economy, which had just begun to take hold after the Kremlin’s last confrontation with the West in 2014, analysts and investors said.

The United States imposed major new sanctions against Russia, striking at senior Russian officials and some of the country’s biggest companies in one of Washington’s most aggressive moves to punish Moscow for its alleged meddling in the 2016 US election and other “malign activity”.

“One gets the impression that since 2014 we have been convinced that sanctions are painless for our economy,” said Kirill Tremasov, head of research at Loko-Invest and former director of the Russian Economy Ministry’s forecasting department.

“This is completely groundless. What happened opens a new stage in relations with Western countries. We have found ourselves in a new reality. And it is very, very serious.”

Analysts and investors in Moscow said the sanctions could consign Russia to years of low growth, frustrating government efforts to stimulate a rebound from a two-year downturn brought on by low oil prices and Western sanctions over Moscow’s role in the Ukraine crisis.

Putin was re-elected for his fourth presidential term in March with a huge majority, but is under increasing pressure to meet voters’ expectations of better growth and assuage concerns about falling living standards.

After two years of contraction, Russian GDP returned to growth of 1.5 per cent last year on the back of higher oil prices, still short of a government target of 2 per cent.

Chris Weafer, a senior partner at economic and political consultancy Macro Advisory, said he still saw Russia’s economy growing by 1.8 per cent this year, with oil prices above $60 a barrel.

“But the big question, of course, is ‘How long does Russia stay in this low-growth environment?’ That’s where the impact of sanctions happens,” he said.

“We all know that the economy needs to grow at a faster pace over the course of the next (presidential) term, it needs to get stronger — and sanctions and the impact on foreign direct investment, that’s where it comes in,” he said. “2018 is the year of Russia in the doldrums.”

The latest round of US sanctions represents the biggest escalation in Western action against Russia since Washington and the European Union first targeted oligarchs close to Putin and their businesses over the Ukraine crisis in 2014.

Investors said the inclusion of people who are not traditionally seen as part of Putin’s inner circle showed that any Russian company or business leader could now be targeted.

Russia’s rouble suffered its biggest daily fall in over three years and stocks in major Russian companies also slid, as investors reacted to the new sanctions.

State-owned Sberbank, often seen as a barometer of the wider economy, fell 17 per cent in Moscow and aluminium giant Rusal lost over half its value in Hong Kong after its main owner Oleg Deripaska was named on the sanctions list.

The increased uncertainty and risk will make it harder for Russian companies to borrow abroad and reduce the amount of inward investment, said Tim Ash at BlueBay Asset Management.

“Unless there is a move to de-escalation, you have to assume that financing conditions around Russia will get even tighter,” he said. “Long-term, that’s going to be bad for growth and mean even more stagnation in the Russian economy.”

Natalia Orlova, head economist at Alfa Bank, said the central bank might now take more time over interest rate cuts that could boost growth: “Based on economic logic, it seems to me that it is dangerous to hurry with a rate cut in such uncertain conditions.”

Loko-Invest’s Kirill Tremasov said the biggest danger of the new sanctions might be in scaring foreign investors off Russian OFZ treasury bonds, popular in the West because of their high yields.

The yield on the benchmark 10-year OFZ rose as high as 7.32 per cent on Monday as the price of the bond fell. It had stood at around 7.05 per cent last week.

— Reuters