UK & US Sanctions Shift Up a Gear - Threatening OFZs & Oligarchs

SANCTIONS ANALYSIS

• The latest shift in sanctions rhetoric from the US & US threatening restrictions on OFZ and Oligarchs is a bit more alarming than the previous human rights-based measures, resulting in meaningless travel bans and asset seizures.
• While the UK has traditionally followed the EU's guidance on sanctions, it is trying to create an independent post-Brexit position in many new matters. One being a harder stance on Russia, with chemical weapons violations being a very personal issue (Salisbury poisoning) – making the UK potentially inclined to follow through on a hard stance, provided it was backed by the US.
• Russia has mostly taken these new sanctions additions with limited response beyond idle threats of a response and expulsions of diplomats. The Kremlin also elicited a very strange and weak response this morning, saying "we hope the US doesn't target Oligarchs."
• An attack on the Oligarchs (as called for by Navalny) would represent a major shift in the narrative, putting Putin's decision-making framework and core power base under pressure ahead of key state Duma elections this year.
• The other focal point is the SolarWinds hacking issue, which the US has vowed a harsh response in the coming weeks - going beyond sanctions to ensure such an event never happens again. To date, sanctions uncertainty has been met with a rebuild in risk premia priced into RUB assets (5Y CDS +14.11% today & 3x EM peers), followed by a relief rally on the eventual weaker-than-expected result.
• However, these threats directly mentioning OFZs are of greater concern and could further exacerbate OFZ inflows at a time of distress in the EM FI space. Although a strong shift in the narrative towards OFZ & Oligarch sanctions is hard to foresee, the tail risk of a hardline response should stay embedded in RUB assets over the next few weeks as the narrative develops.
• Comments from UK & US will be monitored closely for likelihood of follow-through in the coming weeks.