This combination of photos taken on March 17, 2021 shows US President Joe Biden (L) during comments on the implementation of the US bailout at the White House State Dining Room in Washington, DC on March 15, 2021, and Russian President Vladimir Putin, along with his Turkish counterpart, is holding a joint press statement following their talks in the Moscow Kremlin on March 5, 2020.
Eric Baradat | AFP | Getty Images
New US sanctions against Russia are “mostly symbolic” and will have minimal impact on markets and the macroeconomic outlook, economists have suggested.
President Biden’s government on Thursday announced a series of new sanctions against Moscow over election interference in 2020, a massive cyber attack on the US government and corporate networks, illegal annexation and occupation of Ukrainian Crimea, and human rights violations.
Sanctions targeted 16 entities and 16 individuals accused of attempting to influence the 2020 US presidential election, along with five individuals and three entities linked to the annexation of Crimea, and expelled 10 Russian diplomats from the US.
Washington also imposed sanctions on newly issued Russian government debt, causing a slight sell-off of the Russian ruble and government bonds on Thursday.
This measure prevents US financial institutions from participating in the primary market for ruble and non-ruble debt after June 14.
‘Symbolic exercise’
However, economists do not foresee any tangible consequences of the sanctions in their current form.
“The latest round of US sanctions was a mostly symbolic exercise,” Agathe Demarais, director of global forecasting at The Economist Intelligence Unit, told CNBC on Friday.
“Sanctions against Russian individuals and companies are irrelevant as these people and companies have no ties to the US and are unlikely to ever use the US dollar or have bank accounts in the US”
Demarais added that the sovereign debt sanctions are less severe than the initial market response suggests, as they target only the primary debt market and are therefore “easily bypassed through the secondary market”.
The primary market in this case refers to Russian debt securities that are first created and offered to the public, while the secondary market is where those securities are traded among investors.
“This policy choice means that the US government was careful not to harm US investors who hold billions in Russian sovereign debt,” said Demarais.
US officials in particular accompanied the sanctions with a series of statements expressing a desire to improve bilateral relations with Moscow. In effect, the sanctions draw a line under a period when investors wait and guess their timing and size.
‘Lighting’
Vladimir Tikhomirov, chief economist at Moscow-based BCS Global Markets, told CNBC on Friday that some investors were relieved by the removal of uncertainty and rather modest sanctions, reducing the overall level of Russia-related investment risk.
Tikhomirov said the sovereign debt ban was the most important of the new measures, but its impact was still limited.
“ Given the current state of the Russian budget (in 1Q21 the budget was in surplus), a low level of government debt, a conservative fiscal policy and a high volume of accumulated reserves, it is unlikely that the ban on new debt purchases will have a significant impact on state. of Russia’s finances or for the economy in general, ”he said.
Liam Peach, emerging markets economist at Capital Economics, agreed that unless sanctions are extended to all sovereign debt or Russia takes aggressive retaliation, the consequences will be limited.
Capital Economics estimates that the Russian government will spend 2.5 trillion rubles on bonds by 2021, equivalent to 2.7% of GDP, to finance the deficit and extend maturing debt. However, Peach expects almost all debt to be issued in rubles and bought by Russian banks, limiting the impact of sanctions on new issues.
Although previous sanctions led to an extended premium on Russian dollar bonds and currencies, the macro impact was quite limited, Peach emphasized in a research note on Thursday.
“This provides an anchor point, but the impact will of course depend on the scale at which non-residents sell their holdings of outstanding debt,” he said.
“Russian retaliation could include counter-sanctions or heightened tensions with Ukraine, but the key point is that the trend towards greater isolation will only grow further,” Peach noted.
Will there be retaliation?
Tikhomirov said Russian investors do not expect retaliation through economic or financial measures, and therefore remain relatively optimistic about the effects on the markets and the economy.
That said, the main risk in this area is mainly political: as Russia is likely to retaliate through political movements, these could potentially lead to a further escalation of relations between Russia and the West, which in turn could lead to countermeasures from the US and US allies, ”he said.
“Such a scenario can only cause concern for many investors, although the hope remains that Moscow will accept the US offer and also take steps to improve relations with the US and the West in general.”
Economists broadly expect the Central Bank of Russia to hike interest rates next week. Peach predicted that if the ruble were to come under significant pressure and the CBR is concerned about the inflation outlook, more aggressive monetary tightening could be expected. Capital Economics now expects an increase of 50 basis points to 5%.
Meanwhile, Tikhomirov expects an increase of 25 basis points to 4.75% and a possible additional increase of 25-50 basis points later in the year, as policymakers monitor an acceleration in inflationary pressures rather than responding to sanctions.