Review of Russia Amidst Threat of More Sanctions

Weakness in Russian equities, FX, and Fixed Income is likely to persist in the near to medium-term as more sanctions are likely to follow last week’s US-EU coordinated increase in pressure on Putin and Russian leadership.  Russia is a HOLD on valuations alone, but look for bottoming price action and a decisive change of trend (likely to come on signs of a reduction in Sanctions) before buying or adding to Russian equities.

We have paraphrased and compiled key Bloomberg news articles from July 17th, following the crash of MH17, to bring you the following update on Russia and what to expect next.

Recent Developments

On Thursday of last week, the ruble weakened the most since the country intervened in Crimea and Russian stocks fell as the U.S. imposed new sanctions on companies to punish President Vladimir Putin for failing to end support for rebels in Ukraine.

  • The currency lost 2.3 percent to 35.1610 per dollar at 8:26 p.m. in Moscow, the most since March 3.
  • The Micex Index slid 2.3 percent to 1,440.63, the lowest since May 30.A new negative trend may form on the stock market toward the 1,200 support level at RTS.
  • The government’s 2027 bonds slid the most since April 25, with the yield jumping 27 basis points to 9.04 percent.
  • The rate on Rosneft’s dollar-denominated securities due in March 2022 soared 79 basis points to 6.115 percent.
  • Novatek’s similar-maturity debt jumped 61 basis points to 6.16 percent.

Even with the threat of additional sanctions, Russia hasn’t backed down in Ukraine, where Prime Minister Arseniy Yatsenyuk recently urged its neighbor in a TV broadcast to “immediately” stop arming the separatists.

  • Five Ukrainian servicemen were killed and 11 were wounded in skirmishes with separatists in eastern Ukraine during the 24 hours leading up to the Malaysia Flight 17 attack, Defense Ministry spokesman Andriy Lysenko told reporters in Kiev today. He said a Russian plane shot down a Ukrainian fighter jet over Ukrainian territory yesterday and another plane was hit in a separate attack. (This does not include Thursday’s news on Malaysia Flight 17, if it turns out that Russia was involved with the attack on the commercial Malaysian flight, geo-political tensions will spike)

U.S. Army Colonel Steve Warren, a Pentagon spokesman, said the Russian troop presence on the Ukraine border is “intimidating.”  “It’s been building steadily over the last several weeks,” he said. The Russian military “certainly has the capability to conduct operations on either side of the border.”

German Chancellor Angela Merkel, who has been pushing other European leaders for tough action, said Putin’s government hasn’t met the conditions set out by the bloc last month.  “We are all disappointed that we have to take such substantive measures on Russia,” said Merkel, who conferred with Obama on July 15. “Much too little has happened.”

  • It’s very unlikely Putin will reverse course because he sees “strong Russian influence over eastern Ukraine and a de facto veto over potential Ukrainian membership in NATO as vital national interests,” New York-based Eurasia Group analysts Alexander Kliment, Cliff Kupchan and Zach Witlin said yesterday.
  • Putin, a 61-year-old former KGB colonel, has seen his popularity surge since he annexed the Black Sea peninsula of Crimea from Ukraine in March, to a near record of 86 percent, according to the independent Levada Center’s latest poll.

The Sanctions

At face value this is the first major step of third-stage sanctions, and is just a taste of what can essentially come next.  It now seems quite clear that unless the situation in eastern Ukraine de-escalates within the next few days, we are likely to see further sanctions imposed.

  • The new U.S. sanctions will prevent Rosneft, Novatek, Gazprombank and state development bank Vnesheconombank, or VEB, from accessing U.S. debt markets for new financing with maturities longer than 90 days. They also bar VEB and Gazprombank from U.S. equity markets.
  • The U.S. also imposed asset freezes on eight defense enterprises, while the EU said it would halt lending for projects in Russia by the European Investment Bank, the bloc’s in-house lender, and will use its influence to stop new lending by the European Bank for Reconstruction and Development.

Putin, in Brazil, said this “aggressive” response to the four-month uprising by pro-Russian insurgents in eastern Ukraine will only have a “boomerang effect” that will hurt the U.S.’s own interests.

Andrey Kostin, head of state-run lender VTB Group, warned the measures may tip the economy into recession, lead to the “disintegration” of financing and turn Russia into an outcast of global capitalism. “Applying sanctions or large penalties can lead, unfortunately, to the disintegration of the financial system, essentially, and a rejection of further globalization,” Kostin said on Rossiya 24 state television from Australia. “They affect the interests of hundreds of thousands, millions of people and corporate clients.”

  • The penalties are reversing two decades of Russian integration with the global economy and represent the biggest blow to Russian businesses since the collapse of the Soviet Union, worse than the financial crises of 1998 and 2009, said a billionaire who’s among the 20 richest men in the country.
  • All companies in Russia are affected because their U.S. and European partners are reluctant to do business with them, a Russian billionaire said, asking not to be identified for fear of reprisal. Russia’s largest businesses will continue to suffer because Putin will only harden his stance, he said.

U.S. will probably impose harsher sanctions later this year that will target whole sectors of Russia’s $2 trillion economy, which the European Union matching to a lesser degree, Eurasia said in a research note.

International bond sales by Russian companies plunged to less than $5.4 billion in March through July 17 from about $21 billion in the same period last year, making it harder for them to meet their combined $191 billion of foreign debt payments due this year, central bank data show.


Disclosures: This update was written by James Calhoun, a Portfolio Manager at Accuvest Global Advisors. This article is strictly informational and should be used for research use only. It should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Charts and information are sourced from Accuvest Global Advisors and Bloomberg news, unless otherwise noted. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. You should seek advice from your financial adviser before making investment decisions. Investment risks are borne solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

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