(Bloomberg) — You can add Russian sanctions to the list of things traders got wrong about U.S. President Donald Trump’s term in office.
Russian equities slumped to the lowest level in a year after several U.S. senators struck a bipartisan deal to expand penalties imposed on the Kremlin in 2014 over its role in the Ukraine conflict. Less than five months ago, the stocks were trading at a record high on optimism Trump would use his presidency to improve relations with Russia.
The deal marks a deepening rift in relations between the two Cold War foes that have been battered by allegations of Russian meddling in the U.S. elections. If passed, the president would no longer be able to ease or lift sanctions without approval from Congress. The deal would also add additional restrictions to banks’ and energy companies’ ability to raise capital, and allow for new sanctions on state-owned entities in the rail, shipping, metals and mining sectors, as well as energy pipelines
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The Kremlin doesn’t want to enter a new “sanctions spiral”
with the U.S., Russian President Vladimir Putin’s spokesman Dmitry Peskov told reporters on a conference call on Wednesday.
Russia’s benchmark Micex stock index slid 0.8 percent by
3:39 p.m. in Moscow, extending Tuesday’s 1.2 percent drop and heading for the lowest close since June 27, 2016. Investors pulled $6.84 million out of the VanEck Vectors Russia exchange- traded fund on Tuesday.
The proposed deal had little impact on the ruble and local- currency bonds, also known as OFZs, which are both little changed since the start of the week.
According to the proposal, sanctioned banks would be limited to issuing debt with a maximum maturity of 14 days, from
30 days under the current regime, while the ceiling for debt maturity for sanctioned energy companies would be lowered to 30 days, from 90 days currently. Sanctions would be imposed on anyone who invests at least $10 million in any privatization that would “unjustly” benefit Russian officials or their families.
The draft doesn’t include restrictions on sovereign debt or derivatives, but orders a report on what impact such limits might have.
Here’s how investors surveyed by Bloomberg reacted to the news of possible broader reprisals by the U.S.:
* Anastasia Levashova, a fund manager at London-based Blackfriars Asset Management:
“There’s a real risk of a new round of sanctions. Everyone had expected that the situation would improve under Trump, but it turns out things can get worse.
“It’s unlikely that the U.S. can come up with new tough sanctions, but the idea of codifying sanctions so that Trump can’t ease them without congressional approval erases any optimism or market upside. ”
* Sergey Vakhrameev, a money manager at GL Asset Management in Zurich:
“The optimism that the U.S. would ease sanctions has come to an end. Russian stocks will likely fall further from current levels. We don’t know which new sanctions could be introduced, but the worst-case scenario for investors would be a ban on the purchase of Russian shares.”
* Jan Dehn, the London-based head of research at Ashmore Group, which oversees about $52 billion of fixed-income assets:
“Much of this talk of sanctions is domestic political posturing. We have seen that the broad set of sanctions imposed in the aftermath of Crimea has exactly no effect other than causing some short-term volatility, which, in retrospect, was clearly an excellent buying opportunity. I would view new sanctions the same way.
“Having said that, if the sanctions barred secondary-market trading in any securities, this would be negative for us as we would have to divest.”
* Richard Segal, a London-based analyst at Manulife Asset Management, which oversees about $358 billion:
“These proposals alone probably would not have much impact, because they could be symbolic and vetoed, but ultimately if they were imposed on private companies that could cause quite a disruption. A restriction on buying OFZs would be serious.”
* Viktor Szabo, a London-based money manager at Aberdeen Asset Management Plc, which oversees $11 billion of emerging-market
“Anything that can jeopardize state funding would be seen as highly negative. The Finance Ministry has an ambitious issuance plan, and the already depleted sovereign reserves do not allow for a prolonged period of no market access. With no foreign buying, Russia would have to pay a much higher yield to finance itself. However, I don’t foresee sanctions on OFZs.”
* Yannick Naud, head of fixed income at Banque Audi in Geneva:
“The spread between sanctioned and non-sanctioned names has been slowly widening again recently on Russian corporate bonds.
Therefore, any new entry in the U.S. sanctions list could have an impact on each specific security. Because the easing or lifting of sanctions is now more unlikely, we can see some limited repricing in the market.”
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