Ten years ago, a veteran Moscow broker told Euromoney that the financial crisis had been the final straw for less committed international investors in Russia. As he put it: “The tourists are long gone.”
Since then, Russian capital markets have been through the bursting of a consumer credit bubble in 2013, the Ukraine crisis and sanctions by the West in 2014, followed swiftly by the collapse of oil prices, further sanctions in April 2018, and the Russia-related turmoil of the US presidency of Donald Trump.
Clearly, any foreign investors still involved in the market are not of a nervous disposition. So, it came as little surprise that the announcement on April 15 of new sanctions on Russia by the administration of president Joe Biden, including a ban on participation in domestic government bond auctions, caused barely a ripple in either the bond or currency markets.
Any foreign investors still involved in the market are not of a nervous disposition
Of course, this is not the end of the story. The latest round of sanctions was primarily a response to alleged interference in the 2020 US presidential election and cyberattacks by groups linked to the Russian government such as that on Texas software firm SolarWinds last year.
Further sanctions are promised by June 2 as punishment for the poisoning of Alexei Navalny. Yet if the US sticks to its current strategy, these are also unlikely to have much of an impact on financial markets, or for that matter Russian policy.
Targeting
Even a full ban on US financial institutions holding Russian government bonds would not be a disaster for a nation with a low debt-to-GDP ratio, a parsimonious attitude to state spending, and a state-dominated banking sector that is willing and able to take up the slack on domestic bond purchases.
Meanwhile, targeting entities and individuals directly involved in specific cyber and other attacks, as the Biden administration has chosen to do this time around, is unlikely to cause much economic pain to the Russian government or anyone else.
The only sanctions that have really rattled both the Russian establishment and financial markets so far were those introduced in April 2018 – ironically by the Trump administration – on local oligarchs Oleg Deripaska and Viktor Vekselberg.
The apparently random choice of targets and the fact that the sanctions extended to companies controlled by them – which in Deripaska’s case included internationally listed En+ and Rusal – seriously spooked corporate Russia and put a chill on capital markets activity for the best part of a year.
Navalny has been calling for more of the same. In February, his team called for Western sanctions on Russia’s richest and most powerful men, including Roman Abramovich, Alisher Usmanov, VTB chief executive Andrey Kostin and the head of VEB Bank, Igor Shuvalov.
Sabre rattling
As yet, there are no signs that the new US administration is keen to go down that route. Would Navalny’s death in prison, which sadly seems increasingly likely, change that equation? Possibly not.
What has been moving markets, however, are recent Russian military activities that have given rise to the suspicion that the Kremlin is planning a renewed offensive in eastern Ukraine.
This has been seen by many as another round of sabre-rattling, possibly as part of a wider geopolitical stand-off with the US. Then again, Russia has so far been unable to ensure a reliable supply of water to Crimea since Ukraine blocked a crucial canal following the annexation of the peninsula in 2014.
That the threat is being taken seriously by investors is indicated by the fact that, while foreign exchange markets may have shrugged off the sanctions news, the rouble has decoupled from rising oil prices since the start of February.
If the current tensions escalate into military action, Western countries would effectively be forced to respond – and if they really want to hit the Russian establishment where it hurts, they now know how to do it.
In that case, even the most hardened foreign investors might start looking for an exit from Russia.
