Markets in Russia take heavy hit after US imposes sanctions
RUSSIA paid a price in the financial markets on Monday for its standoff with the West. Investors dumped Russian stocks, bonds and the ruble in the face of new US sanctions and signs of cracks in the relationship between President Donald Trump and Vladimir Putin, Russia’s president.
The sell-off left Russian stocks down more than 8 percent and sharply raised borrowing costs for some of the country’s most important companies. The ruble dropped more than 4 percent against the dollar, and the price of government bonds fell.
The combined effect is that life will be at least a bit more expensive for Russian companies and consumers.
It was one of the worst days for Russia’s markets since its 2014 annexation of Crimea, and the rout underscored a simple fact: While Putin has been able to reassert his country as a force to be reckoned with on the world political stage, it is economically isolated and faces risks to its long-term prosperity.
“We’re still dealing with an economy that is run by an authoritarian regime that is very dependent on global oil and oil prices,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. “There’s a lot of downside, and most of it is geopolitical.”
Of course, none of this is a grave threat to the Russian economy, or to Putin, as long as oil prices – up roughly 25 percent over the last year – remain relatively high.
Since Russia’s military involvement in Ukraine four years ago, relations with the West have corroded to their worst level since the Cold War.
Late last month, the United States joined with European Union members to expel scores of Russian diplomats in a coordinated response to the poisoning of a former Kremlin spy in England. Britain blamed Moscow for the attack, which potentially exposed more than 100 people to a nerve agent in the city of Salisbury.
On Friday, the United States imposed sanctions on seven of Russia’s richest men as well as 17 government officials, taking aim at the oligarchs who dominate the economy. The sanctions were a response to a series of aggressions, including interference in the 2016 presidential election.
Then on Sunday, after a deadly chemical attack, Trump took a rare swipe at Putin for his support of President Bashar Assad of Syria.
“Many dead, including women and children, in mindless CHEMICAL attack in Syria,” Trump wrote on Twitter. “President Putin, Russia and Iran are responsible for backing Animal Assad.”
A tweet might appear minor, but it signalled to investors that Russia is likely to remain at risk of further sanctions.
“Anyone who had hopes that sanctions might be lifted, it’s not happening,” said William Jackson, a senior economist at Capital Economics.
Despite Moscow’s rancorous relationship with the United States and Europe, investors have tiptoed back into Russian stocks and bonds over the last year, as the economy proved resilient to the raft of sanctions in recent years.
Inflation, which surged after the sharp drop in the ruble in 2014, has declined. After shrinking in 2015 and 2016, the Russian economy grew a modest 1.5 percent last year, thanks to rising global prices for oil. (The oil and gas sector accounts for an estimated 25 percent of the gross domestic product, according to Goldman Sachs.)
The new round of sanctions jeopardises those gains.
Companies targeted by the latest round of US sanctions suffered some of the sharpest drops Monday. The shares of United Company Rusal, one of the world’s largest aluminum producers, fell more than 20 percent. The company was included in the Treasury Department’s sanctions.
The stock sell-off spread to large Russian banks, with Sberbank tumbling 17 percent and VTB 9 percent.
The widespread nature of the rout – battering companies not directly controlled by the Kremlin and roiling the normally resilient bond markets – is a sign of how nervous investors suddenly are about Russia’s prospects, especially the possibility of sanctions targeting a wider range of people and companies.
“It is very hard to evaluate who is going to be included on the list in the future, if this happens again,” said Vladimir Tikhomirov, chief economist at BCS Global Markets in Moscow. “Russia country risk has increased quite substantially.”