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US to Impose Devastating Set of Sanctions on Russia

The sanctions proposed against Russia’s energy sector could cause more damage, but the details remain unclear.

A proposed "crushing" bipartisan bill introduced by the US Senate on August 2 will not be debated until the autumn and many of the harsh terms could be considerably watered down, Luis Saenz, the co-head of equities at BCS Global Markets said in reaction to the latest round of blows between the two rivals.

A bill was presented that targets Russian debt and energy companies, designed to punish Russia for interfering in the US presidential election, that includes penalties on debt and energy projects as well as requiring a second “Kremlin Report” detailing president Vladimir Putin's wealth. The co-sponsors are three Republicans, including Arizona’s John McCain, and three Democrats.

Saenz urged caution in reacting to the bill, arguing that it was still only a draft and pointing out that the US Congress is now on its summer holiday so no work on the bill will happen until at least September.

Bill co-author Republican Senator Lindsey Graham of South Carolina said the goal is to "impose crushing sanctions and other measures against Putin’s Russia until he ceases and desists meddling in the US electoral process," stops cyber-attacks and removes Russia from Ukraine, according to a Bloomberg report.

The bill is also clearly intended as a rebuke to US president Donald Trump, who was widely criticised by US lawmakers, including many in the Republican party, for being soft on Putin during a controversial summit in Helsinki last month.

The market reaction to the bill was swift with the ruble falling just under 1% against the dollar while bond yields spiked to levels last seen in July 2017 after another round of sanctions was announced, reports Bloomberg.

The bill would also impose new measures on oligarchs and political figures who are thought to be close to Putin, including requiring the State Department to write another “Kremlin Report”. However, the public version of the last such report was little more than a list of oligarchs, lifted from the Russian edition of Forbes magazine's rich list. This new report could go further and designate Russia as a state sponsor of terrorism.

That bill would impose stiff sanctions including on the energy and financial sectors if Dan Coats, the director of national intelligence, determines Russia is continuing to interfere in the US electoral process.

The Banking and Foreign Relations Committees are planning hearings in advance of legislation coming to the floor.

However, the US politicians are likely to tread lightly after they wreaked havoc on the metals market when the April 6 round of sanctions targeted oligarch Oleg Deripaska and his Rusal company, and the US Treasury Department (USTD) had to climb down. Only this week the USTD postponed again the need to comply with a sanction on doing any business with Deripaska or owned any of his companies’ shares and bonds.

One of the biggest questions is if Congress will target Russia’s state bonds. But the Treasury Department has already warned Congress against this as the bonds are widely held by international investors, and if the legislation is too strict a “disorderly exit” from the paper would cause chaos on international markets.

“The 'good' thing is that the bill – apparently – does not sanction traded Russian sovereign debt, which will protect the market and the RUB from what otherwise would have been a rather ugly, rapid and painful exit of investors,” Saenz said a note emailed to clients. “However, sanctions against new issues of public debt will make life for Russia’s Minfin somewhat more difficult but still unlikely to have a dramatic impact. Overall, once/if the ban becomes the law I would expect 2-5% decline in the RUB rate (to RUB65/$) and a similar fall in Russian indices.”

The sanctions proposed against Russia’s energy sector could cause more damage, but the details remain unclear.

“Sanctions against the energy sector potentially are more damaging, long-lasting and destructive,” says Saenz. “There were numerous attempts to introduce such sanctions made in the course of last year, but these were not successful due to a rather firm response from Russia’s partners in EU, most notably Germany. If the EU takes a similar stand this time again, I’m sure that the US State Dept. will advise against the intro of such sanctions. Especially as Europe becomes softer in responding to US pressures to buy their LNG.”

The bill is also likely to face resistance at home from the US oil industry lobby, many of which have projects in Russia and are keen to win more. Likewise, EU energy companies in Europe are likely to lobby against to strict a bill.

The Kremlin is yet to respond to the news and if it does is likely to offer a muted protest.

“To start with, Russia does not have any significant firepower at its disposal – this explains muted, almost non-existent response from Kremlin to the latest rounds of US sanctions. Moscow can opt to ignore the ban on new debt issuance as – at current oil prices – Russia can easily redeem the debt instead of rolling it over. But energy sector sanctions is another matter and I won’t be surprised to see a more material response from Moscow – perhaps ranging from restrictions on US businesses in Russia to less accommodative stance in intl conflicts (Iran/ME, Ukraine),” said Saenz.

 

 

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