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BRUSSELS, September 06, 6:13 /ITAR-TASS/. The European Union has postponed a final decision on sanctions against Russia till Monday against the background of a ceasefire agreement for Ukraine achieved by the Trilateral Contact Group in Minsk.
For the first time since last March the EU ambassadors refrained from instantly rubberstamping the already announced anti-Russian restrictive measures. Analysts believe that the looming threat of suspended sanctions will continue to cause negative effects on the Russian economy, but in general the ceasefire in Ukraine and the EU’s refusal to take more sanctions might whip up the Russian market, increase the capitalization of companies trading on the Moscow Interbank Currency Exchange (MICEX) by 200 billion roubles and push the dollar one rouble down against the Russian national currency.
WEEKEND WITHOUT SANCTIONS
The European Union has delayed the introduction of another package of sanctions til Monday. In the meantime in a joint statement European Commission President Jose Manuel Barroso and European Council chief Herman Van Rompuy said the package of measures had already been agreed on.
The document did not reveal the details of any specific measures but hinted they would be related to accessing capital markets, the defence sector and dual purpose technologies. Also, the package would expand the black list to incorporate the leaders of Donbass and Crimea and some Russian personalities.
In the meantime, foreign mass media have quoted EU documents to disclose some details of the sanction list. Reuters said the preliminary draft of the sanction package would expand restrictions on the export of dual purpose products, reduce to 30 days from today’s 90 the deadline for settling debt instruments issued by Russia’s state-controlled banks and the possibility of a ban on the sale of derivatives. According to the agency the yet-to-be introduced sanctions might hit Gazprombank and Gazprom neft.
The Financial Times said the draft of a new package of sanctions might spread restrictions on long-term borrowings by government-controlled oil companies with assets exceeding one trillion roubles that get more than 50 of their revenues from selling and transporting oil and oil products. The Financial Times estimates that this measure may apply to Rosneft, Gazpromneft, and, possibly, Transneft. Also, similar restrictions may encompass Russia’s arms manufacturing concerns, the daily says.
The proposed restrictive measures are very much similar to those already taken against Russia’s state-controlled banks. The EU has already prohibited European residents from extending medium-and long-term loans to Sberbank, the VTB, Gazprombank, the VEB and Rosselkhozbank. In particular, the EU explained that “the direct or indirect purchase or sale of, the brokering or assistance in the issuance of, or any other dealing with bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued after August 1, 2014 by major credit institutions or finance development institutions established in Russia with over 50 % public ownership or control as of 1 August 2014, shall be prohibited.”
The chief of the debt markets analysis division at Uralsib Capital, Dmitry Dudkin is sceptical the new sanctions may cause great harm. “They are merely a means to put more pressure on Russia,” Dudkin said, adding that Russian companies had stopped borrowings on the foreign markets long before the sanctions - in 2013 - due to an unfavourable market situation.
DOLLAR TO LOSE ONE ROUBLE
The EU’s decision to postpone sanctions spell no great changes for the Russian market or the economy, either, analysts have been saying. But any good news makes the rouble stronger, says UK Kapital analysis department chief Andrei Verkholandtsev. He predicts that the ceasefire in Ukraine and the refusal to take more sanctions may push the dollar one rouble down to 36 roubles. Yaroslav Lissovolik, the chief economist for Russia and the CIS at Deutsche Bank agrees. “The macroeconomic situation as it is, in particular, Russia’s current account balance of payments surplus, the rouble has very good chances to get stronger. A lot will depend on the external background, but from the fair value standpoint the rouble might get stronger,” he said.
That the new sanctions have not been introduced yet “is good for the market in the short term,” says the chief economist for Russia and the CIS at ING Bank, Dmitry Polevoi. “But everybody remains only cautiously optimistic simply because the exit from the crisis (in Ukraine) is only at the very beginning and a great deal is to be done to lift contradictions between Kiev and the self-proclaimed republics,” he said. “Foreign trade, gas and covenants (on the Ukrainian Eurobonds that Russia has bought out) are the matters Ukraine and Russia are still to agree on,” the expert recalled.
“The threat of wider sanctions complicates debt refinancing conditions for Russian companies,” AFK Sistema chief analyst Yevgeny Nadorshin believes. That the sanctions have not been declared yet, but their threat remains and it may push up capital flight from Russia. Amid an adverse refinancing environment Russian companies “will be building up foreign exchange assets and this will be one of the greatest factors for the exodus of capital,” he said, adding he had predicted a 120-billion-dollar outflow of capital from Russia “way before the introduction of sanctions.”
INFLUX OF INVESTORS POSTPONED
The stock market is unlikely to boom on the EU’s decision on sanctions, market analysts say. The Russian market’s most significant jump occurred on September 3, when Ukrainian President Pyotr Poroshenko unveiled ceasefire plans. In one day the aggregate capitalization of all companies trading on MICEX soared by 167 billion roubles, and the capitalization of the RTS index, by 6.82 billion dollars.
Those market participants who have remained sceptical about the chances a ceasefire agreement may be signed and preferred to watch and wait until it actually happens may now support the growth trend, but the effects of that will be rather limited in contrast to the previously observed surge, says Renaissance Capital’s stock market strategist Gennady Babenko. He believes that de-escalation of the Ukrainian conflict is unlikely to induce a massive influx of western investment to the Russian market.
Whatever the case, experts are certain that truce in Ukraine and the EU’s decision to refrain from sanctions might increase MICEX capitalization by 200 billion roubles. The signing of the ceasefire agreement between Kiev, on the one hand, and the self-proclaimed Donetsk and Lugansk people’s republics, on the other, was a major step towards de-escalation of the conflict and paves the way for investors to buy Russian stocks, says senior stocks trader at Zenit bank Alexey Surov. Gennady Babenko hopes that under favourable circumstances the MICEX index may get back to a level of 1,518 points where it had been before the conflict in Ukraine flared up, in other words, by approximately 3% Higher levels are hardly achievable, though.
De-escalation of sanctions and their eventual cancellation is now on the agenda, Babenko said. “Western investors will go to the Russian market only if and when the already effective sanctions are lifted. The postponement of more sanctions is good news, but the foreign funds will go ahead with their internal policy of preventing or restricting their investment in Russia, he said.
The European Union imposed its first sanctions on Russia over the events in Ukraine in March 2014, when Crimea reunified with Russia. The first economic restrictions followed two months later. At first the EU put on its sanction lists only companies doing business in Crimea.
On August 1 the EU shifted to sectoral sanctions and complemented the black list with the arms manufacturing concern Almaz-Antei and the Dobrolyot air carrier. The sanctions were imposed for a period of twelve months to affect banking, arms manufacturing and oil industries. Five Russian banks were prohibited from borrowing EU money for more than 90 days. Simultaneously the EU imposed an embargo on arms supplies to Russia and the import of weapons and related materials from Russia, the export of dual purpose goods and know-hows to Russia, as well as innovative technologies and equipment for deepwater offshore oil extraction.