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Market right to fear more Russia sanctions despite delay


The Trump administration’s decision not to announce new sanctions against Russia on Monday is unlikely to be the end of the sanctions saga, with designations having been proven to be the US's most effective weapon against Russia.

Markets were understandably nervous after the US ambassador to the UN, Nikki Haley, said that new sanctions against Russian companies and oligarchs would be announced by the US Treasury this week.

New sanctions would have added to what had already been a pretty miserable fortnight for emerging market investors, many of whom saw their holdings devastated by sanction designations on April 6.

But on Monday afternoon the President scrapped the plan for the Treasury to announce new designations and unless he decides to tweet the reasons for the reversal, we are likely to be left in the dark as to exactly why the mix-up occurred.

A London-based investment banker with a number of Russian clients said that capital markets were “on the edge of their seats” through Monday, waiting to see who was next on the US sanctions hit list.

The mere threat of sanctions hit both Russian equity markets and the Russian rouble hard yesterday, showing that even a hint of more designations will cause investors to sell Russian risk.

Although this worry eventually came to nothing, there is little to suggest that the episode will represent anything more than a temporary respite.

The US/Russian hostility is unlikely to end any time soon and given the already proven effectiveness of sanctions, surely the US will deploy more of them.

“We are getting into a situation where the US is likely to partake in constant sanctioning of Russia, that’s the only weapon they really have because there isn’t a military option that makes sense,” an emerging markets investor added. “It’s a weapon Trump can use at any time he wants to score political points, especially if the Democrats take back the House.”

Even if the US doesn’t extend the sanctions, its power and willingness to do so is enough to persuade many to get out of Russian risk entirely.

The devastation to both the equity and bond investors in EN+ and Rusal last week shows the havoc that the US Treasury can cause, and all oligarchs will fear they could be next.

Markets now know the power of US sanctions, and know that Trump is willing to use them, despite the potential damage to investors. It would be a bold buyer indeed that ruled out another round.

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