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A
bipartisan group of U.S. senators introduced legislation on
Thursday aimed at penalizing Russia for interference in recent
elections, something the Kremlin strongly denies, as well as for
its annexation of Crimea and actions in Syria.
The sanctions would need to be passed by the full House and
receive President Donald Trump's signature, but if they do
become a reality it would mark a new low in relations between
the former Cold War foes.
They would also hit the energy sector, Russian uranium imports
and a host of oligarchs, but it is a move to ban purchases of
any new Russian sovereign debt going forward that has raised the
most eyebrows.
It is considered one of Washington's most potent tools because
it would effectively freeze the Russian government out of
international borrowing markets, creating a similar scenario to
that faced by Argentina for a decade until 2015, following a
default and a U.S. court ruling against it.
The measure may create fewer problems for Russia though than
were faced by Argentina, given Russia has one of the lowest debt
levels in the world and nearly half a trillion U.S. dollars in
reserves thanks to huge oil and gas export revenues.
Russia is also used to belt-tightening during difficult times
and has sharply cut back on issuing dollar debt after the
Ukraine crisis. In addition, Russia features less in emerging
market investors' portfolios than it did even five years ago.
"Russia is still an overweight for most people at the moment,
but this isn't going to kill the fund industry by any means,"
said Peter Kisler, an emerging market debt manager at North
Asset Management.
As overseas borrowing by the Russian government and companies
has shrunk, so has the country's weighting on bond indexes that
are used by investors.
For instance, Russia comprises just 3.6 percent of JPMorgan's
EMBI Global "hard currency" sovereign bond index, compared to
9.0 percent in 2007.
On the CEMBI corporate debt index, it amounts to 5.0 percent,
down from 14 percent 10 years ago.
To view a graphic on Russia's weighting in global bond indexes
png, click: https://tmsnrt.rs/2K7y48s
So in theory at least, it would be relatively easy for investors
to bypass Russia in portfolios, even if its debt is a current
favorite due to scarcity value and the country's rock-solid
payment credentials.
Mike Cirami, co-director of global income at Eaton Vance in
Boston said the weighting of Russian debt was now small enough
and the premium it offers was low enough for investors to easily
be able to jettison it if needed.
"If all you were was an EMBI investor, you could forget that
Russia exists in my opinion, and you could manage just fine and
not have any problems outperforming (the benchmark EMBI Global
Diversified)," he said.
Russia has a higher 7.6 percent weight in the index for emerging
local currency bonds, the GBI-EM. That's up from 1.5 percent in
2007, but off the 10 percent index-maximum it hit during the
2012-14 oil boom.
But while rouble government debt, known as OFZ, has been popular
with investors, Deutsche Bank analysts last week highlighted a
decline in foreigners' share of the market. Central bank data
showed foreign holdings at 28 percent in June, the lowest since
February 2017.
To view a graphic on Foreign investors have sold Russia's rouble
denominated debt, click: https://reut.rs/2KaAeUM
STOCK ANSWER
It is by no means certain that U.S. sanctions will be deployed
as many reckon the Treasury will hold off from such aggressive
measures.
"I would say that our base case is that Russian sovereign would
be a last-resort sanction, whereas they are likely to use the
corporate sector to target individuals and companies from a
sanctions perspective," said Shamaila Khan, head of emerging
markets fixed income at AllianceBernstein in New York.
"The fact is, once you embark on a sanctions path you just don't
know where it ends," added Khan, who said unpredictability could
weigh on Russian asset prices generally.
The developments nonetheless focus attention on how Russian
markets have stagnated relative to those in other developing
economies. Its importance over the last decade has declined for
bond as well as equity investors.
Russia's weighting on MSCI's emerging equity index, a benchmark
for almost $2 trillion in cash, has dwindled to 3.3 percent from
over 10 percent in 2007. China's weight, meanwhile, has almost
doubled in that period to nearly 30 percent.
That reflects Russia's own stagnation, says Renaissance
Capital's global economist, Charles Robertson. He notes the
three biggest companies in Russia's equity index are the same
ones as back in 2007 - Gazprom, Sberbank and Rosneft. All are
state-controlled.
"At one point, we were asking whether Russia's GDP was going to
catch up with California's," said Robertson "That is certainly
not going to happen now."
And unless there is a shake-up in the Russian political order
and economy, these commodity-reliant companies can expect to
hang on to their top positions, he predicted.
Contrast this with the United States, where the top rankings
change every decade or two. China is replicating that dynamic
with technology giants such as Tencent and Baidu taking over
from previous companies that topped the rankings, including
state-run oil firms and banks. Within MSCI's emerging equity
index too, technology firms have displaced commodity producers
as the biggest firms.
Russia's Gazprom was the biggest company in the index back in
2007. Today it does not make the top 10.
To view a graphic on 'Will sanctions on Russia cause major
impact?', click: https://tmsnrt.rs/2mRF8Nl
(This version of the story has been refiled to clarify
headline.)
(Reporting by Marc Jones and Daniel Bases; Additional reporting
by Patricia Zengerle; Editing by Clive McKeef)
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