Admittedly, this is a bit esoteric, but for those who followed the DASKA story last year and are thus interested to know how the sequel is likely to play out in 2019, we thought we would take a moment to touch on it.
Over the weekend, we tried our best to bring readers up to speed on the latest in the Russia sanctions push. When it comes to US sanctions aimed at the Kremlin and its affiliates, the problem with most financial media coverage (whether mainstream or otherwise) is that if you try to document every development in real time, readers invariably lose the plot.
That’s not the fault of reporters and bloggers and it’s certainly not the fault of readers. Rather, the issue is that there are at least three different parts to this story, where one is the Defending American Security from Kremlin Aggression Act (the 2018 version and its successor, unveiled last week), another involves the Deripaska saga and still another is tied to the Skripal case. Obviously, there are all manner of overlapping narratives and common threads and the whole thing is made more complicated still by the fact that due to unanswered questions about Donald Trump’s ties to Moscow, it’s impossible to know who and/or what actually dictates the administration’s stance on any of it.
So, when someone in the financial media writes a story about the latest developments on the Russia sanctions front, the general investing public has a tendency to just ignore it, knowing that trying to figure out how any one piece of incremental news fits into the broader story is not only impossible for the layperson, but also for US intelligence officials and the State Department because the White House won’t tell anyone what’s going on. Sorry, that’s just the truth of the matter.
Given all of that, I generally find it’s best to step back and do a sweeping review of everything that’s happened over the past year, hitting the high points and putting them in the context of last April’s selloff in Russian assets. That seems to be the most effective way to help everyone keep track of things and that’s what we tried to do on Sunday in “The Russia ‘Sanctions Bill From Hell’ Is Back – Does It Matter?”
Generally speaking, the conclusion from that post was that “no”, DASKA 2019 probably doesn’t matter all that much for markets in general and maybe not even for Russian assets in particular.
That’s not to say it’s not important politically speaking or that it doesn’t have ramifications in the context of everything else that’s going on inside the Beltway. Rather, it’s just to say that if what you’re looking to do is identify vulnerable corners of the market, you might end up drawing a blank or, at best, stating the obvious (where the “obvious” is just that the ruble and the OFZ market should be expected to see knee-jerk reactions on any headlines suggesting “new” DASKA is getting more traction on the Hill).
Ok, so with all of that in mind, Credit Suisse is out with something on this and again, it’s esoteric, but there are a couple of highlights worth pointing out.
The bank begins by reiterating that DASKA 2019 is not all that different (where that means “tighter”) than DASKA 2018. “Apart from other restrictions that are mainly related to the political establishment we are mostly concerned about sanctions on sovereign debt, restrictions on the banking sector and oil and gas sector”, Credit Suisse writes.
On the banks, they echo most other assessments we’ve seen, in observing that the absence of a specific list is something of a relief. “Instead, the bill has a general reference to those banks ‘whose efforts undermine democratic institutions abroad'”, they note, adding that while that’s “a very general definition, it should bring a relief to the largest retail banks in Russia that have limited activity abroad.”
As far as the oil and gas sector bit is concerned, we went over the LNG story in the linked post above, and you can review that for more on the ramifications of the proposed crackdown on energy investments.
When it comes to the OFZ market, Credit Suisse’s contention seems to be that anyone who was nervous about this would have already bailed. Consider the following:
The new sanctions bill does not add much new information for investors, apart probably from the period during which they should cut their exposure to bonds. However, this is exactly what investors were doing for all the time since April 2018 and until January 2019 (Figure 7), when non-residents turned into net buyers of local bonds. Those investors who did not feel comfortable with the new sanctions risks made their decision earlier than last week. Other investors may focus on issues beyond sanctions, like a belief that the fundamentals of the Russian economy are strong and that that would yield a return for them even in the environment of new constraints.
What about the ruble? After all, if you were going to take a view on this, that’s where the liquidity is.
For Credit Suisse, the timing is fortuitous. “The first quarter is traditionally the most favourable period for the rouble, in contrast to the third quarter when similar news was announced”, they continue, on the way to observing that while there was initially “pretty strong demand for USDRUB, it quickly faded due to offsetting supply of dollars coming from exporters.” The bank also cites more favorable BoP flows than last August and April when sanctions risk came calling.
After noting that implied vol. remained “rather subdued” in longer-dated tenors (as opposed to a spike at the front end), Credit Suisse muses that “if rouble volatility does not spike on the back of sanctions news, there is hardly any other strong reason that should keep it elevated.” Given that, the bank wonders whether “the recent price action may be a trigger to unwind negative positions on the rouble’s sharp devaluation expressed through the FX options market.”
That sounds broadly consistent with our benign take on the currency over the weekend, and for Credit Suisse, rates markets are incorrect in pricing in further tightening from CBR. That assumption, the bank says, appears to rest on the idea that sanctions risk will take a similar toll on Russian assets as it did at various intervals in 2018. The bank doesn’t think that’s likely, which is why, ultimately, they believe CBR “will cut the policy rate by 50bps, to 7.25% by year-end.”
The above is food for thought for those interested in this story. We realize that’s a limited subset of readers, but hey, that’s ok.