US Sanctions Are Killing Russian Markets

It’s been a disastrous week for Russian markets — and things could get much worse.

Escalating tensions with Washington could send Russia spiraling into a “severe” economic slowdown, BMI analysts wrote in a note to clients Tuesday.

“Russia-US relations are at a recent low point and developments set the stage for additional deterioration,” they wrote. “Souring relations with the US and more broadly with the West, may lead to a larger slowdown in the Russian economy over the coming years than we currently anticipate.”

After the US Treasury Department rolled out new sanctions against Moscow last week, Russian stocks took their biggest dive in 4 years, with the benchmark MOEX Index sinking nearly 9%. Likewise, the Russian ruble is on its way to a 10% slide this week.

The sanctions target 17 Russian government officials, seven oligarchs with ties to the Kremlin, and the state-owned arms exporter Rosoboronexport. At least 12 other Russian companies, controlled by the affected oligarchs, are also getting hit.

As the US toughens its stance — the tally of recent economic penalties on Moscow is up to 189 — other countries are considering doing the same. And that would sting, especially in the case of further measures taken by the West.

“In particular, the Russian economy remains heavily reliant on trade and investment inflows from the EU,” the analysts wrote.

On top of that, threats of sanctions on the Kremlin’s debt are casting a dark cloud over the Russian bond market. Earlier this year, the Treasury Department drafted a report to assess the impact of sanctioning Russian government bonds.

“Under this scenario, the Kremlin would face tough choices: returning to greater austerity, further depriving the economy of much needed stimulus, or accepting a heavier debt burden which could gradually undermine the country’s long-term fiscal sustainability,” the analysts wrote.

Those fears are pressuring an already tense bond market. After yields spiked more than 25% this week, the Russian Finance Ministry cancelled a ruble-bond auction that was planned for April 11.

There’s no clear end to US-Russia tensions in sight. Treasury Secretary Steve Mnuchin said the most recent round of sanctions were meant to penalize the Kremlin for “malign activity” around the world — most recently by supplying materials to the Assad regime, which is accused of another chemical attack that killed at least 70 civilians in Duomo, Syria.

Still, a meeting between President Donald Trump and President Vladimir Putin is likely to take place in the future.

“We’ll continue, as the president has said, he wants to have a good relationship with Russia, but that’s going to depend on some of the actions by the Russians,” White House Press Secretary Sarah Sanders told reporters last week.