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EU/US Sanctions Under A Microscope - EU May Capitulate, But US Resolute

RUSSIA
  • Initial response to the potential conversion of Navalny's suspended sentence to a full sentence before he arrived in Moscow elicited a very strong response from the EU, mentioning sanctions almost immediately. The US followed this rhetoric too.
  • Early strength from the EU may have been aimed at stopping Navalny's sentencing, or reducing its length, but was never likely to really have any impact on the end decision.
  • Although the EU has had a unified voice on the issue, many lack the will power to decisively take on Russia amid localised pandemic concerns. Germany also has bipartisan interests in the Nord Stream 2 project keeping it from enacting overly harsh sanctions.
  • Meetings in Moscow with Lavrov (not Putin) will be key in assessing the EU's stance, but may see more capitulation from the EU - potentially resulting in watered down measures or none at all. Least likely which would be targeting wealthy Russian Oligarchs with business interests in the EU.
  • The US, on the other hand, is likely to stay resolute in its hawkish stance on Russia and follow through on sanctions promises, but may fall short of targeting the oligarchs and may opt for state officials instead. Russia's default state of operating under sanctions for many years also gives them a diminishing marginal impact, unless applied with a new aggressive approach that shocks markets into seeing a real structural shift in relations and economic prospects.
  • Hence, the impact of any announced sanctions will likely be short-term in nature with an initial spike in risk premia, bond outflows and RUB volatility. However, a portion of this has already priced-in over the past two weeks. Russian assets remain undervalued at current levels and signs that sanctions will be limited may result in a reversal in flows and sentiment, provided global risk sentiment also plays ball.
MNI London Bureau | +44 020-3983-7894 | murray.nichol@marketnews.com
BulletEM BulletEmerging Market News
MNI London Bureau | +44 020-3983-7894 | murray.nichol@marketnews.com
BulletEM BulletEmerging Market News

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