Russian shares tank on US announcement of new Russia sanctions over UK poisoning

Russian shares tank on US announcement of  new Russia sanctions over UK poisoning
Russian shares dropped following new US sanctions announcement
By bne IntelliNews August 9, 2018

The US State Department announced it will impose new sanctions on Russia by the end of August over the alleged used of military-grade nerve agent in the poisoning of former Russian agent Sergei Skripal on UK soil on August 8 leading to a stock market sell off of Russian shares.

The news adds to sanction pressure on Russia that has been mounting following the bipartisan outrage in Washington after the US-Russia summit in Helsinki.

The shares of Russian blue chips in London on August 8 dropped on the announcement, with Russia's most valuable company Sberbank losing almost 8%. Even prior to the announcement talk of possible new sanctions pressured the Russian market, with ruble losing 2% against US dollar on August 8 and yields of 10-year federal ruble OFZ bonds breaking 8% for the first time since spring 2017. The US government has threatened to impose “crushing” sanctions in Russia this autumn.

State Department spokeswoman Heather Nauert on August 8 said it had been determined that Russia “has used chemical or biological weapons in violation of international law, or has used lethal chemical or biological weapons against its own nationals.”

The new sanctions would cover sensitive national-security controlled goods, which could potentially impact "hundreds of millions of dollars," according to an unnamed senior State Department official cited by Reuters. 

The department is determined to introduce a second round of “more draconian” sanctions in 90 days unless "Russia gives reliable assurances that it will no longer use chemical weapons and allow on-site inspections by the United Nations or other international observer groups."

Reportedly the second round of Skripal sanctions could include banning Russian national air carrier Aeroflot flights to the US. Aeroflot's investment case is already currently being questioned, and on August 9 BCS Global Markets and Uralsib Bank both argued that sanction risks could negatively influence the shares of Aeroflot, that gets about 5% of its revenues from flights to the US.

The US has already joined the international condemnation of Skripal poisoning by expelling over 100 Russian diplomats.

However, some see the new Skripal sanctions as a blessing in disguise, which could blow off the steam of post-Helsinki outrage and downplay potentially much harsher sanction bills recently introduced to the US Congress.

"This action is meant to take some wind out of the sails of the various sanctions bills against Russia currently doing the rounds in Congress," Tim Ash of Bluebay Asset Management suggests, arguing that "therein the US [Department of] Treasury wants to try and keep control of the sanctions process by keeping these as executive orders. Once they get legislated through Congress the impact becomes harsher and harder to lift."

Related reports indeed indicate that the US presidential administration is trying to beat the Congress to retaliating for the Russia's alleged election meddling. Reportedly Trump's administration is drafting an executive order that would authorise the president to sanction foreigners who interfere in US elections, according to the Washington Post.

Most recently a "crushing" bipartisan sanctions bill included the "nuclear" option of sanctioning Russian sovereign debt and state banks, which could have devastating effects on both Russia and global financial markets. 

The paper argues that the executive order might be countering the bill mentioned above, with the only mandatory sanctions being against individuals found to have taken part in interference against a US election. 

The co-head of equities at BCS Global Markets Luis Saenz previously 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.

Another possible scenario is the US Treasury being pressured into repeating the April 6 sanctions against cherry picked Kremlin-connected Russian oligarchs, which were the most painful and measures yet (although recent reports indicate the Oleg Deripaska's aluminium major Rusal is close to reaching a deal with the Treasury).

In June Vladimir Yevtushenko and his multi-industry investment major AFK Sistema have previously been singled out as next possible target over alleged participation in projects at annexed Crimea peninsula.