It was standing room only at Russia’s largest stock exchange on Tuesday as the country’s top economic policymakers faced an unenviable job: trying to persuade a crowd of skittish investors that the economy can weather the latest sanctions imposed by the US.
Even while officials including Maxim Oreshkin,economy minister, made their pitch at the Moscow Exchange, the rouble fell nearly 5 per cent in less than an hour to more than 63 to the dollar. Bankers made frantic phone calls and streamed out of the room.
There is ample reason for concern. The US’s transaction bans on 24 Russian oligarchs and government officials and 14 companies, imposed last Friday, come as the economy has barely started a tepid recovery from a two-year recession, endured partly under the influence of earlier western sanctions. As Russian stocks and the rouble were clobbered for the second day in a row, investors wondered whether Washington’s most potent punitive measures against Moscow so far would do what previous rounds of sanctions had not: break the economy’s back.
“Even in 1998 [when Russia defaulted], there was an intellectual framework for how this would proceed. Now we have complete uncertainty and no framework,” a top western banker in Moscow said. “This is much worse because we don’t know what’s going to happen. I spent my whole life trying to bring Russia to western capital markets, and now my life’s work is falling apart.”
Moscow’s main index was up 4 per cent on Tuesday after plunging 8.3 per cent the previous day.
Mr Oreshkin urged calm. The government would concentrate on helping affected companies where hundreds of thousands of jobs were at stake, he said — a reference to Rusal, the aluminium group, which has fallen under the new sanctions together with its oligarch owner Oleg Deripaska.
Many economists agree with the government that the impact of last week’s sanctions list on the wider Russian economy may remain limited and a collapse is highly unlikely.
They argue that in 2014, when western countries began sanctioning Russia over its annexation of Crimea and meddling in eastern Ukraine, the sanctions came on top of the blow that a steep fall in global oil prices was dealing to Russia’s commodity-dependent economy.
Now, oil prices are a lot higher and less volatile. “Investors are obviously fearful that the tension between Russia and the US will deteriorate further and that is why we have seen this over-reaction in the rouble exchange rate,” said Chris Weafer, head of Macro Advisory consultancy. “If there is no material deterioration in geopolitical tension, then the rouble should return to the 59-60 level against the dollar relatively soon. If there is an escalation, especially in the Middle East, then this should also be reflected in the price of oil and that will act as a strong prop for Russia’s finances and the rouble.”
Moreover, Russia’s economy is in better shape than four years ago. Banks and the corporate sector have less foreign debt and the rouble is floating freely, allowing them to absorb external shocks more easily.
“Russian companies and banks have significantly deleveraged since 2014, repaying $120bn in foreign debt,” said Natalia Orlova, chief economist at Alfa-Bank. The share of short-term debt in Russian banks’ and corporates’ debt has also fallen from more than 40 per cent in mid-2014 to around 20 per cent, making it much easier for them to service their debt.
Yet there is no doubt that Washington’s move has added enormous risks to Russia’s economic outlook — a concern for President Vladimir Putin as he prepares to embark on his next six-year term following his landslide election win last month.
One area where a relatively quick impact might be felt is in monetary policy. Russia’s central bank could see itself forced to hold off on interest rate cuts at its next policy meeting in two weeks’ time.
“The Central Bank can no longer be expected to lower rates in the coming half year,” said Alexei Kudrin, an economic adviser to Mr Putin and a former finance minister. The slide of the rouble — as a consequence of the nervousness around sanctions — “demands more attention from the Central Bank on inflation”, Mr Kudrin said.
In turn, that could further enfeeble the economy’s return to growth. The World Bank expects gross domestic product to increase by 1.7 per cent this year and by 1.8 per cent in 2019. Russia’s leading economic policymakers say decisive structural reforms would be needed for the country to grow faster than 2 per cent per year in the longer term.
Mr Putin has pledged that his next term will be centred upon revitalising the economy by pushing through those kinds of drastic changes: more investment in healthcare and education as well as in “technological breakthrough”. While the technocrats running his government were busy reassuring investors on Tuesday, he toured an experimental laboratory at the Russian Academy of Sciences, a visit aimed at demonstrating those ambitions.
But those long-term plans will depend upon investment — which has started to recover from several years of decline — and this may be thrown off track by the latest sanctions. “If Russia wants to grow even one per cent per year or more, the main boost needs to come from investment,” said Vladimir Tikhomirov, chief economist at BCS, a brokerage. “But this can easily be derailed if a more cautious monetary policy raises the cost of credit again.”
Moscow also fears the chilling effect of sanctions, scaring away those foreign investors that had begun to look at Russia more positively again. “The arbitrary nature of the new sanctions may instil a new fear in them that they might get caught up in this if they invest here now,” said a senior government official.
That fear is already taking hold. “When the sanctions first came in, everyone thought they were temporary. When business dried up, everyone thought it would come back,” said a western executive at a fund focused on Russia investments. “It’s only now that people are realising it’ll be like this for a long time.”
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