Russia: New sanctions details are not that scary in the short-term – Nordea

Tatiana Evdokimova, analyst at Nordea Markets, suggests that for the Russia, sanction details released over the weekend proved to be less painful than some anticipated.

Key Quotes

“The clarifications published by the OFAC over the weekend lifted ambiguity around the way the market should interpret prohibition to US banks to give loans to the Russian government.”

“The OFAC Directive clarified that US banks (defined as virtually any type of financial institutions) can no longer participate in the primary market for non-RUB denominated bonds issued by the Russian sovereign. The term sovereign doesn’t include state-owned enterprises on the Russian Federation.”

“The key outcome of the latest round of sanctions is that Russian ministry of Finance will de facto lose the ability to borrow in USD as it is now prohibited to virtually the whole US financial infrastructure including clearing corporations to participate in the primary market for non-RUB denominated Russian sovereign bonds. The measure is hardly really painful for the country since its budget is in surplus for two years in a row, break-even oil price for the budget is around 50 USD/bbl and the bulk of borrowing is done locally.”

“On the positive side, for the time-being negative tail-scenarios for the RUB didn’t materialize yet.”

“Overall negative sentiment in the emerging markets space currently limits upside potential for the RUB. Trade war escalation, not very dovish Fed and dollar strength is a challenging cocktail for the EM currencies. RUB’ initial reaction to sanctions was probably a bit excessive because of the vagueness of initial sanctions wording. Today the RUB is trying to recover somewhat but a sustainable return to levels below 64 vs USD and 71.5 vs EUR requires a noticeable improvement in global risk sentiment.”