Russia & Ukraine: 4 Stage sanctions impact

This report is from Chris Weafer of Macro-Advisory ltd,Chris is a personal friend of Rhod Mackenzie and has worked in Russia for more than fifteen years. Most recently he was voted the best Russia investment strategist for 2013 by investors in separate polls carried out by Thomson Reuters Extel and Institutional Investor magazine.* He has been regularly placed in the top three of these respective polls over the past ten years.

“The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore”
 Vincent Van Gogh
 Russia: For investors and businesses there are three key questions;
 · Will there be further sanctions and, if so, how damaging will they be?
· Regardless of sanctions, how long will the crisis concerning Ukraine last and how distracting will it prove to the hoped for policy response to fix the already weakening economy?
· What will be the legacy risk to reputation and capital flows?
 Ukraine: For investors and businesses in Ukraine the key questions are;
 · Once the Crimea issue is resolved (either way) will the government be able to stabilize the country and prevent factionalism?
· Beyond the expected emergency financial aid, what will be the size and conditions attached to the larger financial package required by Kiev and what will be the impact on economic and earnings trends over the medium and longer term?
· Can a debt restructuring be avoided or is it inevitable as part of the larger bailout package?
·
 See table in attached file for trend in Russia bond yields
 Four stage sanctions
 The EU will decide on additional sanctions measures on March 17th, after the Crimea referendum on Sunday March 16th and after Moscow’s response to the referendum result. EU officials talked about a further three stage sanctions response, i.e. in addition to the measures announced last week, with the first two only falling into the inconvenience category rather than directly disruptive.
 Stage 1, the already announced suspension of visa liberalization and trade talks, has no immediate consequence. Stage 2, which is likely if Moscow opens talks to admit Crimea into the Russian Federation, is expected to involve travel bans and asset freezes. Here also there should be minimal disruption to cross border trade or financial flows, albeit there will be a further deterioration in domestic confidence and, probably, a further slowing of economic activity.. Stages 3 and 4 are, presumably, only likely when Moscow crosses whatever “red-line” the EU/US has identified. A physical incursion into East Ukraine is thought to be top of that list.
    But while Stages 1 and 2 are inconvenient in terms of an immediate impact on economic activity, Stage 2 would exacerbate an already difficult economic backdrop in Russia. If the economy was growing strongly then these sanctions would be hardly noticed. But the economy has been sliding since the middle of last year and any sanctions will have some impact on sentiment, confidence and activity, albeit more slow-burning than an immediate cessation of trade.

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