10:47 AM Tuesday, July 17, 2018
Sanctions Plunge US-Russia Relations into Deep Freeze
Russia's expulsion of US diplomats and closing of properties seen as first slap back after US Congress blacklists Russia; Russia freezes easing of interest rates
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Russia Retaliates for U.S. Sanctions With Ouster of Diplomats

LONDON -- Likely the first step. A warning shot, pending decision by Trump whether to sign the new congressional bill on sanctions into law.

Moscow is hoping that by throwing a few US diplomats out Trump might be able to cling onto the line: "Hey, this is a lose-lose for everyone, let’s think again on Russia relations. I will take a time out on signing the sanctions bill."

Personally I cannot see that flying with Congress, and they are just likely to re-vote the package. Trump will just be creating yet another rod for his back.

Timothy Ash is a senior sovereign strategist for Blue Bay Asset Management

US Ambassador to Ukraine, Marie Yovanovitch, reads a message from President Trump on June 1 as Andy Hunder leads celebrations in Kyiv of the 25th anniversary of the American Chamber of Commerce in Ukraine. (UNIAN/Mikhail Markiv)

Russia Retaliates for U.S. Sanctions With Ouster of Diplomats

By Henry Meyer

(Bloomberg) -- Russia ordered the U.S. to cut its embassy

and other personnel in the country and ousted it from a cottage
and warehouses in Moscow, retaliating angrily to the passage of
a new sanctions bill in the U.S. Congress.

“The passage of the new law on sanctions shows with all
obviousness that relations with Russia have become hostage to
the domestic political battle within the U.S.,” the Foreign
Ministry said in a statement announcing the moves. “The latest
events show that in well-known circles in the United States,
Russophobia and a course toward open confrontation with our
country have taken hold.”

Russia had originally threatened the ouster of diplomats
and seizure of property in December after the U.S. ordered 35
Russian envoys out of the U.S. in protest of alleged Russian
meddling in the election last year.

To contact the reporter on this story:
Henry Meyer in Moscow at

Russia Sanctions Pass Senate With Limits on Trump’s Power

Timothy Ash:

LONDON -- Message here is that Congress does not trust Trump on Russia policy. They are not willing to give their own president leeway to plan/manage sanctions and policy towards Russia. This is quite an incredible indictment.

Hard to see Trump not signing this into law. Otherwise, he will open yet another battle front with his opponents in DC.

He does have his hands full elsewhere, with another failure to repeal and replace Obamacare, the spat to remove Sessions, and eventually Mueller. His move on transgender rights in the military and all the hype from and around Scaramucci, presumably is to play to the GOP core base to open the way for a move still against Sessions. Incredible theater.

Putin was keeping his powder dry Thursday not committing on responding with countersanctions. Presumably, there is still a hope that Trump will delay or stall. But once Trump is forced to sign the bill into law, it seems inevitable that Moscow will respond with something to hurt US interests. Talk is of some targeted actions against specific US business interests in Russia. Likely this will be aimed at those closer to Democratic rather than GOP/Trump interests. Net net it does create a spiral of deteriorating relations.

The market has largely shrugged off the latest sanctions efforts.

Either investors are in denial of impact, assuming Trump will block or buy into the durability of the Russian economy angle. Upside in oil prices is helping.

But it is impossible to spin this latest sanctions move from Congress as positive in any way for Russia over the long term. Sure, in the short term in credit markets, sanctions create positive technicals by limiting supply. But ultimately this means less financing available for long term investment, so desperately needed in Russia.

This just adds to the headwinds acting on Russia’s economy from many sources. The real bad is that they will be very difficult to take off and hence will have an impact for a very long time.

Putin must now be regretting getting too involved in trying to shape US election outcomes. Albeit he must quietly be enjoying the political chaos and unedifying spectacle which is DC politics these days. The US establishment seems to tearing itself apart, helped along the way by Trump and his insurgents.

Russia Sanctions Pass Senate With Limits on Trump’s Power

By Terrence Dopp

-- The U.S. Senate gave final approval to
legislation strengthening sanctions on Russia and giving
Congress the power to block President Donald Trump from lifting
them, setting up a possible clash with the White House.

The measure, passed 98-2 Thursday by the Senate, has
already cleared the House and now goes to the president. The
White House has given mixed messages about whether Trump will
sign the legislation at a time when Trump’s presidential
campaign is under investigation over possible collusion with

The bill, which also imposes new sanctions on Iran and
North Korea, had been delayed while lawmakers resolved
procedural issues and revised language that energy companies
said would prevent many overseas deals.

The Russia sanctions in H.R. 3364 are an unusual signal of
disapproval of Trump from congressional Republicans. Lawmakers
say they want to prevent the president from acting on his own to
lift penalties imposed by the previous administration for
meddling in last year’s U.S. election and for aggression in
Ukraine. House and Senate committees and the Federal Bureau of
Investigation are examining possible ties between the Trump
campaign and Russia.

The legislation puts Trump in a difficult position. Signing
the measure would dilute his power. But rejecting it could lead
to an embarrassing veto override, as the bill cleared both
chambers by wide margins, and lead to criticism that he’s
seeking to protect Russia.

An official in the White House wouldn’t say whether Trump
would sign it, saying only that they are reviewing the bill and
that the administration supports sanctions against the three

How Russia responds will depend on the final form of the
legislation, Russian President Vladimir Putin told reporters at
a news conference Thursday while visiting Finland.
U.S. sanctions against Russia are "absolutely illegal from
the point of view of international law," Putin said. "At some
point we will have to respond. It’s impossible to tolerate
boorishness toward our country forever."

White House Communications director Anthony Scaramucci told
CNN on Thursday that Trump may "sign the sanctions exactly the
way they are or he may veto the sanctions and negotiate an even
tougher deal against the Russians."

The sanctions against Iran, modeled on previous executive
orders, were designed to punish entities that support terrorism,
sell weapons to the country, or help its ballistic missile
program. The bill also authorizes, but doesn’t require,
sanctions on human-rights abusers.
The North Korea sanctions are designed to punish the
country for its nuclear and ballistic-missile programs. The bill
contains additional economic sanctions and requires banks to
ensure their accounts aren’t being used in transactions
involving sanctioned entities.
Lawmakers from both parties said it would be a mistake for
Trump to veto the legislation.
"It’s typically not good for presidents to veto something
that can be overwhelmingly overridden,” said Senator Bob Corker,
a Tennessee Republican and chairman of the Foreign Relations

Senate Minority Leader Chuck Schumer of New York rejected
the idea that Trump would veto the legislation to make sanctions
even tougher.
"If the president vetoes this bill, the American people
will know that he is being soft on Putin, that he’s giving a
free pass to a foreign adversary who violated the sanctity of
our democracy," Schumer said.

The president’s authority to waive or lift sanctions
related to Russia would be limited by the measure, including
sanctions imposed under several laws and executive actions, such
as the prohibition on Russian access to diplomatic properties in
Maryland and New York.

Before granting a waiver, ending sanctions on a person or
entity, or granting a license “that significantly alters United
States foreign policy” on Russia, the White House would have to
submit a report to Congress describing the proposed action and
the reasons for it. Each report would have to highlight whether
the action is intended to change the direction of U.S. policy
toward Russia, as well as the anticipated effects on diplomacy
and national security. Lawmakers could then block any attempt to
ease Russian sanctions.

--With assistance from Ilya Arkhipov and Stepan Kravchenko.

To contact the reporter on this story:

Terrence Dopp in Washington at

Russia Pauses Easing as Sanctions Scare Follows Price Shock

Timothy Ash:

The case for rates cuts is compelling, but the CBR always has to have an eye on geopolitics, and with the threat of more US sanctions looming, it likely will want to take no risks with financial stability. Keep rates stable, and with it the rouble, for the time-being.

Russia Pauses Easing as Sanctions Scare Follows Price Shock

By Anna Andrianova and Olga Tanas
(Bloomberg) -- Russia’s central bank put its monetary
easing cycle on pause after three straight cuts in interest
rates as a deepening standoff with the U.S. threatened to
compound an inflationary “shock” last month.

The one-week auction rate will remain at 9 percent,
according to a statement on Friday. That matched the forecasts
of 22 of 35 economists in a Bloomberg survey, with the rest
seeing a decrease to 8.75 percent. There’s still “room” for rate
cuts in the second half of the year, the central bank said.
“Short-term and mid-term inflation risks persist,” policy
makers said. “Volatility in global commodity and financial
markets, as well as exchange-rate dynamics amid elevated
geopolitical risks may have negative implications for exchange-
rate and inflation expectations.”

Rattled by inflation veering further away from its target
of 4 percent in June, the central bank now has to contend with
the threat of U.S. sanctions and the risks it presents to the
ruble as geopolitical tensions grow increasingly ominous. While
policy makers, led by Governor Elvira Nabiullina, remain
confident of reaching the goal by the end of the year, the
question is whether the surge in food prices will translate into
higher inflation expectations after they already stalled above
10 percent for two months.

“The central bank needs the ruble to be stable to achieve
its inflation objective and to align inflation expectations with
its official target,” Piotr Matys, an emerging-market currency
strategist at Rabobank in London, said in a note before the
announcement. A decision to hold rates unchanged “should provide
the ruble with at least some support and should reduce the risk
of further depreciation.”

The Bank of Russia has said that rising geopolitical
tensions and a weaker currency already prompted non-resident
investors to “actively” sell off ruble-denominated bonds on the
secondary market starting in mid-June.

Ruble, Oil

Recent gains in the ruble failed to provide enough
assurance for the central bank to ease further. While it
recouped some losses as oil prices perked up, the Russian
currency remains the second-worst performer against the dollar
in emerging markets in the third quarter. It gained 0.2 percent
after the rate decision.
Still, this month’s interrup

tion in easing is unlikely to
last long. Policy makers believe the seasonal spike in prices
will prove fleeting, with inflation slipping back into decline
in July after jumping to an annual 4.4 percent last month. On a
weekly basis, it’s already decelerated to zero growth for the
first time since May.

‘Minimum Delays’

“The food price gains are expected to subside in the coming
months,” said Lilit Gevorgyan, a senior economist at IHS Markit
in London. “Hence the monetary easing is expected to continue
with minimum delays this year.”
Regardless, the central bank is sticking to its “moderately
tight” stance as the focus shifts from ensuring disinflation to
keeping price growth stable near 4 percent and anchoring
inflation expectations at that level. Volatility in oil and the
prospect of stronger consumer demand as Russia’s economic
recovery picks up pace present additional risks to inflation in
the medium term.
“The central bank is bound to lower its policy rate,” said
Wolf-Fabian Hungerland, an economist at Berenberg Bank in
Hamburg, Germany. “Given the recent spike in inflation and the
bank’s very careful track record, however, we will probably not
see the next rate cut until September.”

--With assistance from Zoya Shilova and Andre Tartar.

To contact the reporters on this story:
Anna Andrianova in Moscow at;
Olga Tanas in Moscow at

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