[Analytics] Russia’s latest sanctions a year in the making, but surprises everyone

Just when everyone thought the political risk has come off of the Russian securities market, bam! Washington hits Russia with a left hook. The latest sanctions upgrade comes a year after the bill was introduced, and many months after President Trump was scheduled to sign it. Kenneth Rapoza specially for the Forbes.

As a result of last night’s action, the Russian ruble tanked and Citibank is predicting bond yields to rise by around 30 basis points. The Russian 10-year yield already moved from 7.34% to 7.5% as of market close Friday.

“The timing is surprising because there hasn’t been any announcements or warnings from Washington that it was planning to act in the absence of new Russia-related developments that would warrant such actions,” says Agathe Demarais, global forecasting director at The Economist Intelligence Unit.

She thought Trump would sign the sanctions law this year, even though it was hard to defend such actions against a Russia largely void of any new foul play. Negative Russia headlines have been quiet.

The conditions for not imposing sanctions related to the use of chemical weapons included Russia providing “reliable assurances” that it will not use chemical or biological weapons and allowing for on-site inspections by the United Nations. Russia apparently did nothing of the sort, so Trump may have felt impelled to act.

The implementation of the Chemical and Biological Weapons Control and Warfare Elimination Act, or CBW Act, is the responsibility of the executive branch, making Trump the final decider.

Moreover, Trump and Putin spoke on the phone this week. There was no news in the Russian press about pending sanctions. Now Russian Twitter is aflutter with the possibility of even more sanctions.

CBW sanctions against Russia ban American lenders from granting loans to the Russian government, but does not stop them from lending to Russian corporations in the language of the law.

One concern of the Act is that U.S. investment banks run the risk of Treasury’s ire if they buy Russian sovereign bonds. However, investors that tend to be big holders of Russian debt, such as Goldman Sachs, are not traditional lenders in the corporate loan business. Discrepencies and interpretations of the law will keep lawyers busy and fund managers quiet.

According to the EIU, Russian public debt stands at just 10% of GDP so it is not in need of foreign funders. Its fiscal accounts are in surplus. However, the extra-territorial impact of these sanctions means that all international financial institutions —including European lenders — may decide to move away from the Russian lending market, and in the worse case, its government bond market. Such a move would have wide repercussions for the international financial system, EIU analysts say, as it force Russia to reduce the use of the dollar in Russia’s economy in an attempt to circumvent sanctions.

In addition to CBW sanctions, market rumors are that the U.S. Senate is back to making moves towards sanctioning the construction of the Nord Stream 2 gas pipeline between Russia and Germany.

Washington sees that pipeline two ways: a threat against the Ukrainian economy as the pipeline would replace Ukraine as a European transit. And as a way to reduce market share of Russian oil and gas in Europe, a market the U.S. would love to capture.

Sanctions on Nord Stream 2 is highly unpopular in Germany. Europe is also working around U.S. sanctions on Iran. Sanctions on oil and gas from Russia and Iran would be seen as troublesome in Europe.

“There’s a lot of uncertainty around whether new Russian firms (will be) targeted, or only those sanctioned previously,” says Demarais in an emailed conversation just before hopping on a plane for holiday. “There’s also uncertainty around the precise targeting of government entities. I suspect this is intentional as raising uncertainty around U.S. sanctions is something the U.S. government has been doing for quite a while. There’s room for maneuvering here, as we saw happen with the Rusal sanctions,” she says of Russia’s biggest aluminum producer run by Oleg Deripaska, whose name was dragged through the mud during the early months of the Special Counsel investigation into Russian meddling in the 2016 election. Rusal sanctions were removed in favor of Deripaska relinquishing control of the company.

Wall Street had given up on Russian sanctions, especially after the completion of the Russian investigation which failed to uncover any real plot to defeat Hillary Clinton in a co-conspiracy with the Trump campaign.

Moreover, there have been renewed sanctions on Iranian crude, and the threat of sanctions against Hong Kong.

Trump’s latest sanctions upgrade against the Russian government gives him more ammunition to declare himself tough on Russia, rather than in cahoots with its president, Vladimir Putin.

From a foreign policy perspective, it makes him “the most credible candidate to protect U.S. interests against perceived Chinese and Russian aggression,” Demarais wrote in a client note today.