Sanctions Risk Is Back in Russia. Here’s What’s at Stake

(Bloomberg) -- Russian markets are once again being plagued by multiple sanctions threats that could materialize before the end of the year.

The prospect of new Western sanctions has helped drive the ruble back toward a four-year low reached during the oil price crash in March. Only Turkish government bonds have performed worse than Russia’s in emerging markets over the past three months.

Viktor Szabo, a longtime investor in Russian bonds at Aberdeen Asset Management, says the upcoming U.S. elections pose the biggest uncertainty for the market. He notes, however, that the risk is much smaller than it used to be because there isn’t much left that can be targeted without creating a wider fallout.

“It would hurt if they banned access to Russia’s domestic debt, but I don’t see that as being likely,” said London-based Szabo, “If so, Russia has plenty of reserves, they are well prepared.”

Below is a rundown of the sanctions Russia may or may not face in the coming months, and how they could affect markets.

Election Meddling

The U.S. elections are the biggest sanctions wild card for investors and are probably a factor keeping many at bay. Russian officials deny meddling, either now or in the 2016 elections.

• The Treasury Department introduced new measures against Russian individuals on Sept. 23 for cyber-related interference in the campaign, but much tougher penalties with the potential to move markets could also be in the cards.
• Two bipartisan bills that seek to sanction Russian sovereign and corporate debt in response to election meddling have circulated on and off in recent years without making it into law.
• Russia is conducting a “very active” campaign to denigrate Democratic candidate Joe Biden and sow divisions in the U.S. political scene, FBI Director Christopher Wray said this month. Biden has said he’d make Moscow pay for election meddling, calling Russia an “opponent.”
• Read more: The Kremlin Is Getting Alarmed at Prospect of a Biden Win

Navalny Poisoning

Lawmakers in the U.S. and European Union are deciding how to respond to findings by German doctors that Russian opposition activist Alexey Navalny was poisoned using the banned nerve agent Novichok last month. The Kremlin has refused to open an investigation into his illness.

• A bipartisan group of senators introduced a bill earlier this month proposing to block assets of Russian officials “complicit in brazen violations of international law” including the recent poisoning.
• German Chancellor Angela Merkel hasn’t supported that option. Merkel, who visited Navalny in hospital last week, is demanding the Kremlin investigate the attack and is discussing a response with European and NATO allies. In the process, she has backed away from her support for the Nord Stream 2 gas pipeline, which would bring more Russian gas to Germany.
• It took the White House about a year and a half to respond to respond to a similar chemical weapons attack against a former Russian spy in the U.K. in March 2018.
  • The measures, implemented a year ago, banned U.S. banks from buying new issues of non-ruble sovereign Eurobonds but left the much-larger market for sovereign ruble securities, known as OFZs, unaffected.
  • At the time, some analysts pointed out that the U.S. Treasury Department only needs to change the definition of “sovereign debt” in its directive to expand the penalties to OFZs.

Belarus

Another area of tension is Belarus, where the Kremlin is backing President Alexander Lukashenko in the face of mass public opposition to his 26-year rule. The opposition, supported by many Western governments, refuses to recognize Lukashenko’s legitimacy after the country’s contested Aug. 9 elections.

• So far Russian President Vladimir Putin has offered Lukashenko security guarantees and a $1.5 billion loan, while avoiding the kind of direct intervention that could provoke sanctions.
• EU efforts to sanction dozens of Belarusian officials stalled earlier this month when Cyprus refused to sign off unless other member states expand a blacklist on Turkey.
• U.S. officials are becoming increasingly distracted by their own presidential election, likely pushing events in Belarus further down the agenda.

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