Putin Sanctions at Economic Tipping Point as Markets Fray


Russia’s ruble, bonds and stocks rallied on March 18, a day after the European Union announced sanctions against the nation as President Vladimir Putin prepared to annex Ukraine’s Crimean peninsula.

Fast-forward six months and escalating EU and U.S. penalties and the ruble is at a record low, Russian banks pay the most on record to gain dollar funding and government bonds have suffered the biggest losses among emerging markets, according to data compiled by Bloomberg. The Micex Index of stocks is down 6 percent from this year’s high on June 24.

The reversal for the ruble is driving up inflation amid the slowest wage growth in more than three years, while rising yields have led to the scrapping of nine straight bond auctions, pressuring government revenue. The consequences are beginning to feed through to growth, said Ivan Tchakarov at Citigroup Inc.

“Sanctions at present are biting more with regard to financial markets and less with regard to the real economy,” Tchakarov, the chief economist at Citigroup in Moscow, said by e-mail yesterday. “We may see the real impact on the economy only next year.”

Russia is locked in a standoff with its former Cold War adversaries, who accuse the Kremlin of supporting rebels in east Ukraine. While formally blocking a handful of the biggest companies from foreign debt markets, sanctions have shut out “everyone” because investors and banks are “very cautious,” Bob Foresman, head of Barclays Plc in Russia, said Sept. 16.

‘Dead Weight’

The rate on a five-year cross-currency basis swap between the Russian and U.S. currencies reached negative 242 basis points on Sept. 16, the most since at least 2006, according to data compiled by Bloomberg. A negative rate signals traders are willing to pay a premium to obtain dollar cash flows for rubles.

In a move to calm the markets the central bank will provide $3 billion a day through foreign currency swaps at a fixed interest rate, it said Sept. 16. Lenders are hoarding about $20 billion on accounts at the Moscow Exchange’s National Clearing Centre, Vedomosti reported, citing three unidentified members of Moscow Exchange FX committee.

“It’s impossible to raise even short money,” Fedor Bizikov, a money manager at GHP Group in Moscow, by phone yesterday. Banks are hoarding foreign currency, which is acting like a “dead weight” in the money market, he said.

Ruble Retreat

Meanwhile, the ruble’s drop is hurting consumers, stoking inflation even as wage growth slows and pressuring an economy forecast to expand this year at its slowest rate since 2009.

The ruble has retreated 14 percent in 2014, the worst performer among 24 emerging markets tracked by Bloomberg after Argentina’s peso. Yields on government 10-year debt rose 123 basis points since Russia’s incursion into Crimea at the start of March, the biggest increase among developing countries. Russian consumer price growth accelerated in August to 7.6 percent, compared with 6.5 percent in December.

“Inflation shows the effect of sanctions” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki said by phone yesterday. “There was no seasonal deflation whatsoever, not even a hint.”

The currency extended its decline to a record low this week after Central Bank Chairman Elvira Nabiullina kept interest rates on hold on Sept. 12. Policymakers had sought to stem the ruble’s slump with 250 basis points of increases since February. It traded up 0.2 percent at 38.4135 per dollar at 10:59 a.m. in Moscow today.

Budget Boost

While the Finance Ministry has canceled nine straight bond auctions since the crisis deepened in July, citing “unfavorable market conditions,” the weaker ruble has boosted the budget by increasing tax inflows from energy and commodity exporters. The weaker currency has also prevented stocks from deeper declines by improving earnings prospects for companies with sales abroad.

The U.S. expanded sanctions last week against Russia to include the country’s largest bank, OAO Sberbank, and energy companies as well as five state-owned defense and technology companies, joining the EU in tightening restrictions. A shaky cease-fire is in place in eastern Ukraine after fighting that has claimed more than 3,000 lives.

“The companies felt the sanctions first, then the stock market, then the bonds joined,” Konstantin Artemov, money manager at Raiffeisen Capital in Moscow, said by e-mail.


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