COMMENT: the removal of sanctions on Derirpaska’s companies left the Russian OFZ bond market cold

COMMENT: the removal of sanctions on Derirpaska’s companies left the Russian OFZ bond market cold
The Russian OFZ treasury bonds failed to rally after sanctions on leading Russian companies were dropped for the first time
By Rosbank in Moscow January 29, 2019

The removal of three Russian companies – Rusal, En+ and EuroSibEnergo – from the SDN sanctions list is a big deal, Rosbank said in a note.

This unprecedented move by the US Treasury contrasts vividly with the general trend of sanctions-related headlines regarding Russia since 2014. It’s not usual that three big names are cleared from the sanctions list even before the sanctions enter into force. Since being announced in April 2018, the deadline for implementation of the sanctions has been pushed back several times. However, neither Russian govies nor the ruble rallied on the headline. Why not?  

Firstly, few would assume that the positive resolution of the Rusal saga symbolises a broader reversal of US authorities’ desire to impose new restrictive measures on Russia. The Mueller investigation is ongoing, and there’s still a strong incentive for various media outlets to accuse President Trump of behind-the-scenes Russian ties. Moreover, there’s still a lot of tension between the two countries in terms of bilateral relations (e.g. the US is expected to launch termination of the strategic missiles treaty on 2 February) and international affairs (e.g. discord in reacting to recent events in Venezuela).

Secondly, some would even say that the current positive developments could backfire. Most political analysts we have read interpret the termination of the US government shutdown, in its current form, as a victory for Congress and a loss for Trump. In this context, giving Congress yet another pretext to accuse the US Administration of being too soft on Russia may not be helpful for the Russian assets in the longer run.

Finally, Russian domestic fundamentals are barely improving. Inflation has yet to reach the 1Q19 local peak, and a CBR rate hike in March is still on the table. On top of that, the CBR has rushed to re-launch delayed FX purchases, thereby offsetting the pause in open market operations from August to December 2018. This could signify an end to ruble’s appreciation bias despite seasonal current account strength. So, the OFZ market requires more than improved sanctions sentiment to rally on. Rather than jumping on the positive headlines from the US, we will monitor the all-important data releases on Wednesday, which include the outcome of the regular primary auctions and a weekly inflation print.