VTB Capital, analyst Alexey Zabotkin:
The main source of discontent for us is that Western officials continue to threaten further sanctions. Namely, both U.K. Prime Minister David Cameron and U.S. Secretary of State John Kerry made statements yesterday to that effect. The Russian financial markets are likely to remain unsettled until a credible ‘steady-state’ is attained, and investors can assess the impact on the macro outlook and the circumstances of individual issuers.
Vladimir Osakovskiy, economist at Bank of American Merrill Lynch:
Despite limited short-term foreign exchange funding risks, the main implication of external economic pressure is a considerable increase in borrowing costs. Long-term yields on [Russian government] bonds are back above 9% again, despite the lack of any new supply. All of this could be the reason for the potential deeper 6.1% drop in investment, which we expect under the pessimistic macro scenario of further escalation of the Ukrainian crisis. This could push the economy into a 0.2% recession this year.
Yaroslav Lissovolik, Chief Economist of Deutsche Bank Russia:
The new sanctions reinforce some of the macro risks that started to mount ever since the launching of U.S. sanctions earlier this month – this relates in particular to ruble weakness, higher borrowing costs for Russia’s corporates as well as bouts of higher capital outflows. Overall, however, a full assessment of the implications of the new round of sanctions will be possible only after the release of the official statement from the EU on the full details of sanctions applied versus Russia.
Insight Investment, portfolio manager Robert Simpson:
With the sanctioned entities and sovereign having healthy balance sheets, their outstanding debt is cheap but that is only on the assumption that the political situation doesn’t deteriorate from here and there’s no further ramping up of sanctions with an implication on whether you can actually hold Russian corporate debt. We are running a short position in both Russian credit and the Russian currency.
Charlie Robertson, global chief economist at Renaissance Capital:
[The sanctions] are likely to interrupt the positive upward momentum of the Russian gross domestic product recovery that was on course to deliver 2% growth in the third quarter of this year, according to the monthly updates Renaissance Capital does with the New Economic School in Moscow. Russia benefits from the inflow of international capital, and that has now been partly cut off to the state sector. But the sovereign is allowed to borrow to fund banks and corporates in Russia. The sanctions are time limited, which means that by the end of October, around the time of Ukraine’s parliamentary elections, they could be removed. This will require a calmer situation in eastern Ukraine.
Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ:
This latest wave of sanctions certainly appear to be the toughest yet and, given the Russian economy was already on the verge of recession, these latest measures will likely tip the economy into a contraction that could turn severe. The energy sanctions have apparently been chosen carefully in order to not curtail current production but to limit Russia’s ability to expand going into the future by cutting off exploration technologies. The arms ban also only applies to future deals. But the technology ban hitting the energy exploration sector will certainly have a knock-on effect in the euro-zone, perhaps in particular for Germany.
Alexander Bespalov and Ronald Paul Smith, research analysts at Citigroup:
At this point all Russian oil and gas companies stand to be affected to some degree or another. However, we’d say that Rosneft appears to be the most vulnerable: Not only has the company already been targeted by previous sanctions, albeit likely with minimal impact – it is the primary developer of Russia’s offshore; is enthusiastically testing the Bazhenov shale; has a large, ambitious refinery upgrade program; and has plans to enter the LNG (Liquefied natural gas) business with partner ExxonMobil Corp.
Daniel Hewitt and Stella Cridge, economists at Barclays:
Market issuance of Russia banks and companies has been very light since the crisis intensified at the end of January and has recently ground to a standstill. The news [of the latest sanctions] can only add more pressure to an already challenging operating and financing environment.
Aberdeen Asset Management, fund manager Viktor Szabo (who is underweight Russia):
The big questions are what is the next round and when? There is always the nuclear option of banning investors from holding existing debt assets, and that is the risk investors have to assess if buying into this dip. On the rates side yields are starting to look attractive. We’re not at the point where we’re pulling the trigger but the discussions are already there.
Jefferies analyst Jason Gammel, writing about BP:
BP delivered strong cash generation and significant improvement in Upstream profitability in 2Q, particularly in the U.S. – and it was completely overshadowed in the market by an increased perception of Russian risk. While we believe that there is nothing in the EU sanctions that detract from neither Rosneft’s ability to do business nor BP’s ability to exercise its shareholder rights in the company, the required risk premium appears to be increasing on Russian assets. BP’s equity stake in Rosneft has a current market value of about $13 billion, about 8.5% of BP’s total market value – and when headlines lead to market doubts about the ability to do business in Russia it will be difficult for BP’s stock to perform well.
Yerlan Syzdykov, head emerging markets bond and high yield at Pioneer Investments:
Although the sanctions may have a limited immediate effect, it is already evident that the impact will be broadly negative for the Russian economy in the medium to long run, as cost of external financing will remain elevated to Russian companies, both public and private, while access to some advanced western technologies, especially in oil sector, will also be hampered. The sanctions are the most serious attempt to punish Russia so far, especially given they are coming from the most important and long-standing trade partner. This inevitably will push Russia to deepen cooperation with Asian countries, especially with China, in both trade and financing links. Some state-owned companies already have access to Chinese funding, we expect Russia to shift focus further on bilateral financing arrangements.
Angus Halkett, emerging market debt portfolio manager at Stone Harbor Investment Partners:
Russia has underperformed, so to some degree looks cheap. The question is whether to stick with what we’ve got or to buy now because it’s cheap. We need more detail first. You can still own outstanding debt from sanctioned entities. But what if that changes, and you can’t hold any? That’s bad. Over the past few months, we have been moving away from the quasi-sovereign Russian names that we thought could be sanctioned and now have been, and moving more into the sovereign. Barring investment from the sovereign would be the last step of sanctions.
– Tommy Stubbington and Ben Edwards also contributed to this article.