Russia: Tougher sanctions to weigh on economy - BBH

According to Marc Chandler, Global Head of Currency Strategy at BBH, the latest US sanctions on Russia are already creating havoc in Russian assets. 

Key Quotes

“The US is punishing Russian entities for profiting from “malign activities.”  These include but are not limited to Russian activity in Ukraine, supporting Syrian President Assad, and efforts to subvert various Western democracies.”

“Any assets in US jurisdictions are now frozen, while US entities are barred from doing any business with the people and firms on the list.  This basically cuts off all foreign funding for these companies.  Indeed, Rusal has already warned that technical defaults are possible for certain obligations.  The government may eventually take over some (but not necessarily all) of these debt obligations but there are limitations.”

“The Russian government has pledged to support those firms that are affected.  Prime Minister Medvedev asked his Cabinet to draw up measures to support sanctioned companies, but short of taking on their debt obligations, measures are likely to fall short.  Russia has also threatened to retaliate but it’s not clear what it can really do on such a widespread economic scale.”

“The economy is recovering but remains sluggish.  GDP growth is forecast by the IMF at 1.7% in 2018 and 1.5% in 2019 vs. 1.5% in 2017.  GDP rose only 0.9% y/y in Q4, the second straight quarter of slowing.  With this latest round of sanctions likely to hit hard, we see downside risks to the growth forecasts.”

“The fiscal outlook bears watching due to possible contingent liabilities stemming from the sanctions.  We are seeing a cyclical improvement in the budget numbers as the economy recovers from higher oil prices, but this may be running out of steam.  The nominal deficit was equal to -nearly -2% of GDP in 2017.  We see upside risks to the 2018 and 2019 numbers.”

“While external vulnerabilities would appear to be low, sanction that have cut off access to global capital markets will have significant impact on corporate Russia.  If a state-owned company can no longer service its debt, the government will have to assume those liabilities, thereby draining precious foreign reserves.”

“The ruble continues to underperform.  In 2017, RUB rose 5% vs. USD and was ahead of only the worst performers ARS (-14.5%), TRY (-7%), BRK (-2%), IDR (-1%), PHP (-0.5%), COP (+0.5%), and PEN (+4%).  So far in 2018, RUB is -4% and is ahead of only the worst performers ARS (-8%), TRY (-6%), and PHP (-4%).  Our EM FX model shows the ruble to have STRONG fundamentals.  However, the sanctions are a game changer and so the ruble seems likely to continue underperforming.”