People are drawing parallels with the Crimean annexation and sanctions put in place then - which heavily impacted the Russian market.
But the macroeconomic Russian situation is very different today - it is much better:
Oil: (Russia's biggest export) the price was collapsing back then. Today it is and has been rising and touched a 3 year high in dollars and is at an all-time high in Roubles.
Russia's finances: the high oil price gives a comfortable fiscal surplus (the government having frozen nominal spending for 3 years). Spending is anyone much more controlled than in 2014.
Inflation: in 2014, inflation was 8%, today it is barely 2%.
The need for external funding is drastically reduced given how state owned enterprises have been purged of dollar debt.
The sanctions announced last week are punitive and far beyond what we have seen before. US investors are forced to sell Russian assets and being banned from trading any instrument related to 3 corporates owned by the Russian oligarch Oleg Deripaska. These measures are comparable with North Korean/Iranian sanctions.
The Russian equity market has lost 15% in dollar terms since the sanctions were announced, mainly due to the Rouble which plunged 12% against the dollar.
Where do we stand today?
- Behind us (for now): the strikes took place Friday overnight. Targeted and short lived intervention. Official statements are rather confirming a one-off intervention. No confrontation and no escalation. Rather a positive vs. market fears pre-strikes.
- Ahead of us :
- The Duma will be discussing/voting today the Russian countersanctions. Russia has very little commercial/financial leverage vis a vis the US hence those sanctions should be market neutral. The bill mainly includes restriction on imports of US goods and cooperation in areas such as nuclear, rockets and aircrafts.
- A new bill has been introduced to sanction the 'newly issued' Russian debt. We expect this won't be approved because of the contagion effect on existing Russian sovereign debt of which US investors are sizeable holders. This contagion effect (and the risks to the broader financial system) is the reason the US Treasury advised the US administration not to sanction the sovereign debt.
- US administration is said to announce today more sanctions against Russia. According to Nikki Haley, those sanctions will be directed to companies involved in dealing with equipment related to chemical weapons use. This could clearly lead Russian assets lower, to what extent depends on the breadth and scale of the new sanctions.
A buying opportunity?
The Russian market is trading at 5.3x forward earnings, a big discount to its own history and by far the cheapest market of the emerging markets. The currency and the equity market have disconnected from their usual hook: the oil price which remains a major driver of Russian assets.
Financials have lost more than a 1/3rd of their value, namely Sberbank, despite the quality of the name.
The political situation is still moving and may get worse before it gets better. The moment there are signs of stability slightly improving - that is the time to pick up over-punished assets.
Michel Wiskirski - Emerging Market Analyst - Carmignac