The new sanctions imposed on Russia cause panic among investors. The rouble has dropped by 10% for just over a 24-hour period, and the Russian stock market is affected by even greater declines. Representatives of the central bank and the Russian Ministry of Economic Development are trying to ease the situation, but it may not help - writes Marcin Lipka, Conotoxia senior analyst.
The past quarters have been positive for the Russian economy. The currency has stabilised, inflation has fallen to around two percent, the price of oil has risen, and rating agencies have increased the Russian Federation's credit rating. However, everything has changed in recent hours, when the market began to value the sanctions imposed by the US Treasury Department.
Ruble has been knockdown
Friday's press release from the US authorities imposed new sanctions on 7 Russian oligarchs, 12 companies they own, and 17 government representatives. The Treasury Department noted that all assets under the US jurisdiction of nominated persons and entities and any other entities blocked by law as a result of their ownership by the sanctioned party are frozen.
Rusal, a sanctioned company and one of the world's leading aluminium producers listed on the Hong Kong Stock Exchange, fell by 55% during two sessions. However, the consequences of the US actions are not only visible on individual companies. The MSCI Russia denominated in USD, which includes ten leading Russian companies, at times lost 20% of its value compared to Friday's closing.
On Monday morning, the dollar cost about 58 roubles. Today, the exchange rate has risen to 64, which means that the US currency has become more expensive by over 10% in just over a 24-hour period. A similar scale decrease was also visible in relation to other currencies. On Friday, the zloty cost less than 17 roubles, and today the exchange rate tested the 18.7 level. The Russian currency in relation to the Polish currency was also the weakest until March 2016, i.e. since oil prices were at the bottom (about 35 USD per barrel), and the financial credibility of the Russian Federation was, according to rating agencies, at the horrible level.
Serious risks may persist
The Russian authorities are trying to bring peace to the situation. Elvira Nabiullina, head of the central bank and a respected economist in the world, said in Moscow today that the monetary authorities are ready to reduce the [weakening] effect of the crisis by increasing interest rate. According to Bloomberg, the economy minister Maxim Oreshkin said that sanctions are a good test for Russia's macroeconomic policy.
However, Russia could fail this test in the near future. The stable economic situation and increases in rating attracted foreign capital to the local market, which benefited from high interest rates and attractive prices in the market. The new sanctions are clearly disrupting this calm situation, which could lead to the same capital outflow. Behaviour of local importers may also have a negative impact on the ruble, as they will panicily buy foreign currency and make it difficult for the ruble to return to its previous stable levels.