The Jerusalem Post

‘Russia in the doldrums?’ – New US sanctions to weigh on recovery

- BY JACK STUBBS AND POLINA NIKOLZKAYA

MOSCOW (Reuters) – 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 on Monday.

The United States imposed major new sanctions against Russia on Friday, 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, the head of research at Loko-Invest and a former director of the Russian Economy Ministry’s forecastin­g department. “This is completely groundless. What happened on Friday 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.

President Vladimir Putin was reelected for his fourth presidenti­al term in March with a huge majority. But he is under increasing pressure to meet voters’ expectatio­ns of better growth and assuage concerns about falling living standards.

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

SLOW-GROWTH ENVIRONMEN­T

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

Chris Weafer, a senior partner at economic and political consultanc­y Macro Advisory, said he still saw Russia’s economy growing by 1.8% 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,” Weafer 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 ruble suffered its biggest daily fall in over three years on Monday, and stocks in major Russian companies also slid, as investors reacted to the new sanctions. Stateowned Sberbank, often seen as a barometer of the wider economy, fell 17% in Moscow, and aluminum giant Rusal lost more than half its value in Hong Kong after its main owner, Oleg Deripaska, was named on the sanctions list.

TIGHTER MONEY

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

“Unless there is a move to deescalati­on, 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.”

The Russian central bank might now take more time over interest-rate cuts that could boost growth, Alfa Bank head economist Natalia Orlova said, adding: “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% on Monday as the price of the bond fell. It had stood at around 7.05% last week.

Foreigners’ holdings of OFZ bonds stood at nearly $40 billion, or 33.9% of all OFZ bonds as of February 1, the last period for which data was available.

“For foreign investors, this is a very, very serious signal... and now there could be some OFZ outflows,” Tremasov said. “This will be reflected in the growth of interest rates in the economy.”

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