From BNE Intellinews, October 29:
MACRO ADVISORS: Mapping the consequences of inevitable sanctions on Russia
Lenin famously said “everything is connected to everything else” and with more, possibly “crushing,” sanctions due to be imposed on Russia soon the effect on the Russian economy and capital markets is profound, but not all bad.
Many factors, such as the currency, policy options and economic performance, are connected to sanctions events and threats. Below is a diagram that attempts to show the important connections for investors and companies working in Russia, as well as an attempt to sketch out how the moving parts fit together.
And more sanctions are coming: it is only a matter of when, and in what form, rather than if. The next round could be passed as soon as late November when the 90-day review of Russia’s compliance with the Chemical and Biological Weapons (CBW) sanction is scheduled to take place and, if Moscow is deemed not to be compliant, then President Trump must choose at least three out of the six possible punishments that have been published.
Sanctions have been a matter of fact for all involved with Russia since early 2014 but what is different this time is the relative calm while waiting for the next wave to hit. There have been no threats of major retaliation from the Duma and the ruble has pulled back to the mid-sixties against the dollar and appears parked there until the next sanctions are announced and the impact assessed. President Putin’s comment to his US counter-part is simply to “get on with it”
It is fair to say that one reason for the relative calm is a sense that conditions do not exist for the worst-case threats, such as blocking Russia using the US dollar and US financial system for transactions, being put in place and that Moscow is relatively immune from more of the same sort sanctions that it has been hit with over the past five years, including the escalation since the Countering America’s Adversaries Through Sanctions Act (CAATSA) legislation was signed by President Trump on August 2 last year.
There is a sense that Russia has not only adapted well to the sanctions but has actually used the fact of the sanctions to push through much needed monetary and fiscal changes that would otherwise have been avoided or taken much longer. Therefore, the argument goes, more sanctions will only accelerate that process.
Such thinking is clearly wishful and wrong. Sanctions are always damaging in some respect and, in the case of Russia, have resulted in a big slowdown of inward investment in recent years. Big corporations and investors that do not need to be in Russia, i.e. who are not already well established and making money in the country, have generally adopted a prudent stay away stance and have no intention of straying from that anytime soon.
But it is equally wrong to say that sanctions have not been a positive driver of change in Russia. The government would certainly have had more options to ride out the oil price collapse in 2015 and 2016 -- run a bigger budget deficit and borrowed more -- if it were not for sanctions. The ruble would have been defended and the big boost to economic competitiveness, resulting from the ruble collapse, would not have been seen. Russia would not today, for example, be the world’s biggest exporter of wheat and sugar if not for the response to sanctions. It also would not have the world’s sixth lowest level of national debt and a trade surplus approaching $200bn.
Another benefit from the sanctions, both direct and indirectly, is that Russia finally had to stop talking about weaning the economy off oil dependency, and vulnerability, and do something about it. In 2013 the federal budget needed $115 per barrel to balance. This year it should balance at $53 per barrel and is on course to balance at $44 per barrel in 2021. The so-called Fiscal Rule, which diverts all surplus oil wealth to the National Fund, and thus available to fund long-term projects and investment incentives, had long been discussed as an ambition but it took sanctions to force the issue and make it happen.
But just how badly will sanctions affect the economy and business?
Ruble. The ruble exchange rate only has a correlation with the oil price when there is no sanctions event or sanctions threat. In the case of either of these factors the ruble entirely responds to the event and ignores, for example, the oil price to, which it previously had the closest correlation. The graph below shows the effect of the April 6 round of sanctions , moving the exchange rate to the 62-64 rate against the dollar, and the August sanctions, which briefly pushed the rate to 70 before settling back in the 65-68 range while waiting to see what happens next....
