The U.S. Midterms Are a Key Event for Russia

(Bloomberg) -- Elections are usually a non-event for investors in Russia, but this week votes thousands of miles away have grabbed their attention.

The U.S. midterms are creating the kind of uncertainty over Russia’s future that’s usually absent from the country’s own predictable ballots. At stake are proposals for fresh sanctions currently under discussion in Congress, which many believe could end up being harsher if the Democrats win a majority.

The U.S. Midterms Are a Key Event for Russia

“A Republican win is better for Russia,” said Tatiana Orlova, an economist at Emerginomics in London. “The Republicans are currently focused on a stand-off with China,” while the Democrats “seem to believe that Russia is the main threat to American security.”

The political makeup in Washington matters for Moscow because the range of potential measures for punishing Russia over alleged election meddling and poison attacks is so wide. Lawmakers will be choosing between very harsh proposals such as blocking Russia’s biggest banks and banning purchases of new sovereign debt, and softer measures like asset freezes on military companies.

There’s also the added risk that U.S. intelligence agencies find evidence that Russia interfered in this week’s election, making sanctions that take effect immediately far more likely.

Kremlin spokesman Dmitry Peskov said on Tuesday that the midterm elections were unlikely to ease tensions between the two countries. “We should not be deceived and believe that this will bring some clarity,” he told reporters on a conference call. “So far, there are no definite trends toward normalizing relations.”

And as if all that wasn’t enough, the U.S. State Department needs to certify to Congress by Nov. 6 whether Russia met conditions set in the Chemical and Biological Weapons Act, something Moscow has said it doesn’t plan to do. That decision may be followed by a separate round of sanctions, although they are unlikely to have much impact on markets.

Here are some thoughts from investors and analysts about how the mid-terms will affect Russia:

  • Viktor Szabo, fund manager at Aberdeen Standard Investments
    • “With Republicans keeping both chambers the likelihood of continuity is higher, which would mean continued focus on China, but also the congress moving ahead with anti-Russian legislation”
    • “A Democratic victory in the lower house might bring about impeachment risks, putting pressure on Trump to do something to divert attention -- in that case Russia can easily become a target”
  • James Barrineau, head of emerging-market debt at Schroder Investment Management in New York
    • “A Democratic win might be viewed by markets as increasing the odds for more punitive sanctions for Russia. However, the actual imposition of sanctions might have to wait until the dust settles on Congressional turnover”
    • Russia’s strong fiscal and current account surplus means that “only considerable progress toward much more punitive sanctions would meaningfully affect either the ruble or dollar bond prices”
  • Paul McNamara, fund manager at GAM Ltd. in London
    • Investors are “much less focused on the elections than the rhetoric around existing sanctions plans”
    • A Democrat win would be bad, but I’m “not sure it would make a massive difference,” the market would also have to distinguish the impact on Russia from the general effect on markets, which is tricky in its own right
  • Inan Demir, economist at Nomura Holdings Inc. in London
    • “Perhaps the more important thing will be intelligence agencies’ assessment of the election process. Even with Republican majorities in both houses, if intelligence agencies report that there was meddling in the election, then Russian assets would suffer in anticipation of sanctions”

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