LONDON -- Comments around the US House of Representatives decision to support the latest Russia sanctions bill, including sanctions also levied on Iran and North Korea.
First This revised bill has to go back to the Senate for approval, but it seems inconceivable that the Senate will not now approve the House bill, given the huge majorities already seen in support of tighter sanctions on Russia already in both houses.
Once approved by the Senate, the bill will go to President Trump for final sign off. Despite Trump’s own “special chemistry” with President Putin, in the context of the Russia-gate scandal now engulfing the Trump presidency, it seems inconceivable that he would risk battles with Congress by not signing this bill into law. He needs to expend any remaining political capital trying to secure some much needed “wins” on his domestic policy reform agenda, including reform of Obamacare. A presidential veto would only delay adoption of Russia sanctions bill given that Congress would then override the presidential veto in a follow up vote.
Second Whichever way you look at this, this is bad news for Russia.
We can argue about the strength of the specific sanctions, on sectors, companies or individuals. But merely by being put in the same basket as Iran and North Korea, these sanctions will impart significant and further reputational damage on Russia. Some investors will want to think again before committing longer term investment in Russia. By codifying sanctions it ensures that they remain in place for decades to come, unless we see an about turn in terms of Russian policy towards the USA, the West and the near abroad – which under Putin seems unlikely.
Sanctions will remain in place for a long time, and they will likely deter foreign investment into Russia – at a time when Russia is desperately in need of that investment. After three years or more of competition/conflict with the West, military intervention in Ukraine, Syria and Georgia, and sanctions, plus 18 years of largely failed economic policies under Putin, the Russian economy faces stagnation.
Sanctions will just further sap longer term investment into Russia, and with it growth, and will further capital flight and the brain drain out of Russia. They will serve to further the isolation of Russia, from the West, and further the stagnation of the Russian economy which has been the key theme playing out over the past few years.
Third So far the market reaction to the latest sanctions iteration has been muted. This might reflect an erroneous assumption that Congress will ultimately not agree to this sanction bill, or that Trump will ultimately veto it.
It might also reflect the fact that the assumption is the short term impact will be limited – and reflect the fact that Russia has shown some durability against sanctions lobbied thus far. Althought, there has been a discernible impact on growth. Also, in credit markets there is an assumption that sanctions will not be extended to secondary trading, while restrictions on new debt issuance will continue to provide a technical underpinning to markets, by limiting new supply. Short term this underpins credit spreads, and acts to stabilize Russian markets, but does not help the long term growth story.
It is fairly remarkable to think that at the start of the year the consensus in the market was that soon after taking office President Trump would remove sanctions on Russia. And yet, we are actually likely to see a tightening of sanctions on Russia through this latest Congressional bill. And yet, despite this, Russian credit spreads are tighter by around 20bps YTD – partly this might reflect the broader market hunt for carry. But it also implies that markets are still discounting the impacts from additional sanctions on Russia.
This sanguine mood might change, depending on a report slated to be produced within 180 days by the US Treasury and National Intelligence over the impact of expanding sanctions to include sovereign debt and derivative products. Any extension of sanctions to secondary trading of Russian sovereign debt would likely produce an extreme market reaction. That said, I would still expect Secretary Steven Mnuchin to veto the adoption of any such measures given Trump’s well stated views on Russia – notwithstanding any further escalatory actions from Russia itself. But this creates a risk of something more extreme.
Perhaps more importantly in terms of market reaction will be how Russia responds to approval of the latest Russian sanctions bill.
Moscow is promising tough, albeit not asymmetric measures. It might be mindful not to risk a further tit for tat on the sanctions front, which would likely only hurt the Russian economy further. It would also be mindful to not want to further undermine potential allies remaining in the White House and in the Trump Administration.
But a fair question now must be whether the Putin Administration sees any hope these allies can deliver anything positive towards Russia, and that rather Moscow must now be seen to show strength in response to this affront to its status by the DC establishment.
The risk perhaps now is that Moscow opts to go back on the geopolitical offensive, with new stresses in relations with the West around flash points in Ukraine, Syria, Libya and even North Korea. All this would just take US/Western-Russia relations to new lows still, and with the risk of yet more sanctions on Russia, causing even more damage to the Russian economy.
Timothy Ash is senior sovereign analyst for Blue Bay Asset Management in London.
Russia Says New U.S. Sanctions Killing Chances for Improved Ties
By Stepan Kravchenko
(Bloomberg) -- Russia threatened to retaliate against new
sanctions passed by the U.S. House of Representatives, saying
they made it all but impossible to achieve the Trump
administration’s goal of improved relations.
The measures push U.S.-Russia ties into uncharted territory
and “don’t leave room for the normalization of relations” in the
foreseeable future, Russian Deputy Foreign Minister Sergei
Ryabkov said Wednesday, according to the Interfax news service.
Hope “is dying” for improved relations because the scale of
“the anti-Russian consensus in Congress makes dialogue
impossible and for a long time,” Konstantin Kosachyov, chairman
of the international affairs committee in Russia’s upper house
of parliament, said on Facebook.
The bill passed by a vote of 419-3 on Tuesday strengthens
sanctions against Russia less than three weeks after President
Donald Trump and his Russian counterpart Vladimir Putin held
their first official meeting at the Group of 20 summit. The
measure, which now goes to the Senate, requires Trump to seek
congressional approval before easing sanctions imposed under the
Obama administration for Russian meddling in the 2016
presidential elections and its support for separatists in
Ukraine. The White House has sent mixed signals about whether
Trump will sign the bill.
Trump will sign the law because “he’s a prisoner of
Congress and anti-Russian hysteria,” Alexei Pushkov, a senator
in Russia’s upper house of parliament, said on Twitter. The
sanctions represent “a new stage of confrontation,” he said.
Russia has prepared “economic and political measures that
will be adopted if the Senate and Trump support the bill,” said
Vladimir Dzhabarov, deputy chairman of the international affairs
committee in the upper house, the RIA Novosti news service
reported. Relations with the U.S. “are at such a low level that
we have nothing to lose” by retaliating, he said.
Putin said after the meeting in Hamburg that he believed
Trump accepted his denial that Russia interfered in the
election. Congressional committees and the Federal Bureau of
Investigation are examining possible collusion between the Trump
campaign and Russia, which Trump has dismissed as a “witch
The House vote adds to deepening Russian gloom over
prospects for a breakthrough in relations with Trump, six months
after he took office pledging to improve ties with Putin. Russia
threatened last week to expel U.S. diplomats and seize embassy
property in Moscow, after Ryabkov failed to gain agreement at
talks in Washington for the return of Russian diplomatic
compounds taken by the Obama administration in December in
response to the election hacking.
To contact the reporter on this story: Stepan Kravchenko in Moscow at email@example.com