This combination of images created on March 17, 2021 shows U.S. President Joe Biden (L) during remarks on the implementation of the U.S. rescue plan in the White House state dining hall in Washington, DC on May 15, 2021. March 2021, and Russian President Vladimir Putin, along with his Turkish counterpart, hold a joint press statement following talks in the Kremlin in Moscow on March 5, 2020.
Eric Baradat | AFP | Getty Images
U.S. new sanctions on Russia are “mostly symbolic” and will have minimal impact on markets and macroeconomic prospects, economists have suggested.
President Biden’s administration on Thursday announced a series of new sanctions against Moscow for 2020 electoral interference, a huge cyber attack on U.S. business and government networks, illegal annexation and the occupation of Crimea. ‘Ukraine and human rights abuses.
The sanctions targeted 16 entities and 16 people accused of trying to influence the 2020 US presidential election, along with five people 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 sovereign debt, which sparked a slight sell-off of the Russian ruble and sovereign bonds on Thursday.
The measure prevents US financial institutions from participating in the primary market of debt denominated in rubles and non-rubles after June 14.
“Symbolic exercise”
However, economists do not anticipate any tangible consequences of sanctions in their current form.
“The last round of U.S. sanctions was a mostly symbolic exercise,” Agathe Demarais, director of global forecasting for The Economist Intelligence Unit, told CNBC on Friday.
“Sanctions on Russian individuals and businesses are irrelevant, as these individuals and businesses have no ties to the United States and probably have no intention of ever using the U.S. dollar or having bank accounts in the United States.”
Demarais added that sanctions on sovereign debt are less stringent than the initial market reaction would suggest, as they only target the primary debt market and therefore “can be easily circumvented through the secondary market.”
In this case, the primary market refers to Russian debt securities created and offered to the public for the first time, while the secondary market is what is traded among investors.
“This political decision means the U.S. administration was careful not to hurt U.S. investors, who hold billions of Russian sovereign debt,” Demarais said.
In particular, US officials accompanied the sanctions with a series of statements expressing a desire to improve bilateral relations with Moscow. Sanctions effectively set a line in a period of investors waiting and guessing their timing and extent.
“Relief”
Vladimir Tikhomirov, chief economist at Moscow-based BCS Global Markets, told CNBC on Friday that some investors were relieved by the elimination of uncertainty and fairly modest sanctions, which reduced the overall level of risk of investment related to Russia.
Tikhomirov said the ban on sovereign debt was the most important of the new measures, but its impact was still limited.
“However, given the current state of Russia’s budget (in the first quarter of 21, the budget was in surplus), the low level of sovereign debt, conservative fiscal policy and the large volume of accumulated reserves, the Prohibition of new debt purchases is unlikely to have significant implications for the state of Russia’s finances or the economy in general, “he said.
Liam Peach, an emerging market economist at Capital Economics, agreed that the consequences will be limited unless sanctions are extended to all sovereign debt or Russia launches aggressive retaliation.
Capital Economics estimates that the Russian government will issue 2.5 trillion rubles of bonds in 2021, equivalent to 2.7% of its GDP, to finance the deficit and overcome overdue debt. However, Peach predicts that almost all debt will be issued in rubles and bought by Russian banks, limiting the impact of sanctions on new issues.
While past sanctions have tended to lead to a prolonged premium on Russian dollar bonds and currency, the macro impact has been quite limited, Peach noted in a research note Thursday.
“This provides an anchor point, but of course the impact will depend on the scale that residents do not sell their holdings in outstanding debt,” he said.
“Russian retaliation could consist of counter-sanctions or increased tensions with Ukraine, but the key point is that the tendency to increase isolation will only grow more,” Peach noted.
Will retaliation come?
Tikhomirov said Russian investors do not expect retaliation through economic or financial measures and therefore remain relatively bloody about the implications for markets and the economy.
“That said, the main risk in this area is mainly political: as Russia is likely to retaliate with political movements, these could lead to a further escalation of relations between Russia and the West, which in turn could trigger contraction of the US and its allies, “he said.
“This scenario cannot fail to worry many investors, although there are still hopes that Moscow will take the U.S. offer and also make moves aimed at improving relations with the United States and the West in general.”
Economists expect the Central Bank of Russia to raise interest rates next week. The peach is predicted that if the ruble is under significant pressure and the CBR develops concerns about the inflation outlook, a more aggressive monetary tightening can be expected. Capital Economics now expects a 50 basis point hike to 5%.
Meanwhile, Tikhomirov predicts a rise of 25 basis points to 4.75% and a possible further rise of 25-50 basis points later in the year, as policymakers monitor the acceleration of inflationary pressures instead of reacting to sanctions.