There's No Real Reason To Sanction Russia Anymore
Other than just hating Russia because it’s, well, run by super Bond villain Vlad Putin, there is no reason to sanction Russia anymore.
Market rumors of Senate hawks like Marco Rubio hitting Russian government and quasi-sovereign bonds with sanctions have been around ever since Trump took the oath of office. But now that the Special Counsel investigation is over and the only thing Robert Mueller could find involving Russians that was worth punishing were these 13 “troll farms” that had no impact on the election outcome, and whose participants will never see a U.S. court or prison, Russia, for Wall Street anyway, has been exonerated.
The Mueller testimony was—as one hedge fund manger put it—a total face plant for the Democrats and anyone looking to link Trump to a villainous Russia. This story is officially over as a market mover.
On the day Mueller testified before Congress about his 400-plus page report about the Trump campaign and the Russians, the VanEck Russia (RSX) exchange-traded fund had already been dumped the night before—going from a trading volume of over 6 million shares to 4.2 million on Wednesday. By Friday, RSX volume rose to 5.5 million shares, hitting $23.64 per share.
Year-to-date, Russia is the hottest-performing emerging market. The VanEck ETF is up 26% while No. 2 Brazil is up 18.9% and the MSCI Emerging Markets benchmark is up 9.3%.
Since the summer of 2014, Russian oil and gas firms and Russian banks have been sanctioned by the U.S. and to some extent Europe, though Europe did not sanction oil and gas entities. The sanctions were all due to Russian involvement in a separatist movement in East Ukraine.
Yes, Ukraine. Remember that country?
Once Trump was elected, the Ukraine-based sanctions quickly turned to punishing Russia for “electing Trump” via election meddling, which, as Mueller defined in his report, meant Russian companies that may or may not have ties to the official government in Moscow spent a few hundred thousand dollars on Facebook ads, half of which ran after the election.
Election meddling became part of new sanctions law, a law that required an act of Congress to remove rather than an executive order by Trump. At the time, less than a year into Trump’s presidency, nearly every Democrat and enough Republicans believed Trump was compromised by Russia.
At the same time, Russia’s insistence on railroading Washington’s favorite pastime in the Middle East—regime change, this time in Syria—also got used as another reason for sanctions.
We went from Ukraine to Trump and Syria as a reason to keep tightening the screws on Russian oil and gas companies like Gazprom, and its state-owned banks led by Sberbank. Both are the lifeblood of Russia’s commodity-heavy economy.
For many in the market, there was a real risk that an angry Congress would eventually make it impossible for American investors to own Sberbank bonds. Or maybe even Sberbank equities through funds like VanEck’s.
Few wanted to talk about it.
Now that the election meddling story is over, and the Special Counsel investigation is complete, the only things that remain a real threat to Russia are Ukraine and Syria.
Ukraine has a new government now, one that is not as anti-Putin as former president Petro Poroshenko.
Syria could pick up steam again, and Russia will back its leader Bashar Assad. But barring U.S. and Russian military colliding somehow, there is nothing new on that front to irk sanction-loving lawmakers.
“The conclusion of the Mueller investigation reduces the urgency for the U.S. Congress to impose additional sanctions on Russia,” says Federico Kaune, head of emerging-markets fixed income at UBS Asset Management. Kaune warns that Russian ruble valuations are stretched now that investors doubt deeper sanctions.
Of course, there is always the risk of a surprise on the sanctions front. One cannot discount the fine arts of statecraft causing a ruckus here and there. Or Russia somehow running afoul of Iranian sanctions, even as Trump is showing signs that he wants to talk with the Iranian government, not unlike his desire to talk with the North Korean government.
In other words, barring a geopolitical surprise out of Ukraine (unlikely), Syria (possible) and Iran (possible), sanctions escalation against Russian corporates is over. This is a serious headwind removed from the Russian investment outlook.
The Russian economy has managed its current sanctions bottlenecks. The good news for Russia is that it will not have to figure out a way to live with new ones anytime soon.
“We are taking on more exposure to Russia,” says Asha Mehta, a fund manager with Acadian in Boston. “The concerns around investor sentiment has become much more muted. There’s value there now and the risk level out of Russia is a bit more benign.”
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