Russia’s Sanctions Sneer Straddle
Russian shares again veered toward double-digit falls dragging Eastern European markets along as the US Treasury imposed the first institutional energy and financial sector sanctions respectively on Rosneft- Novatek and Gazprombank-VEB barring them from long-term dollar borrowing. Their portfolio values plunged immediately as investors scrambled to gauge the wider boycott dimensions, especially as further punishment loomed with a civilian jet downed soon after by pro-Russian Ukrainian rebels, as their bonds were removed from the benchmark CEMBI index. The names should be able to rely on central bank and alternative international lines for refinancing through year-end, but the external bond window could again close indefinitely after syndicated loans dropped 80 percent to a post-crisis low of $3.5 billion in the first half. Officials revealed $80 billion in capital flight for the period although the current account surplus also rose on higher oil prices to 3.5 percent of GDP on 1 percent overall growth. The softer ruble off 5 percent against the dollar aided the balance as President Putin and his team reaffirmed increased trade ambitions with the rest of the BRICS at a Brazil summit launching their development bank and foreign exchange reserve backstop. Moscow will appoint top executives to steer infrastructure projects due to begin in 2016 as Shanghai won the headquarters nod. Even before the falling out over Crimea annexation it had criticized Washington for failure to implement the 2010 IMF quota and governance changes, a lapse which helped motivate “New Bank” creation and spur Fund Director Lagarde to consider moving ahead without US ratification. Congress rejected the recent Obama Administration attempt to insert the appropriation into approval for Ukraine bilateral and multilateral aid, as the second program installment is poised for release amid worsening fiscal and output indicators. Eastern disruption will add half a percent to the deficit as the economy is projected to shrink 5 percent, according to the Finance Ministry. The benchmark interest rate was nudged 3 percent to 12.5 percent in mid-July as consumer price inflation stood at 12 percent and the currency crashed 30 percent versus the greenback. The 2017 bond settled around the pre-war 8.5 percent yield as S&P improved the ratings outlook to stable. The stock market up 25 percent through July has been a top MSCI frontier performer despite the capital account turning negative to the tune of 1.5 percent of GDP. Foreign banks have not pulled out pending the results of industry stress tests and likely recapitalization under the Fund arrangement, as restrictions remain in place on hard-currency access and trading.
Slovenia’s banking difficulties were prominent in another round of elections where newcomer Cerar, son of a famous gymnast, won with 35 percent of the vote on a platform slowing the privatization drive designed to cover bailout and social welfare spending. Fund-raising needs are covered through early 2015 after EUR 3 billion was allocated for bank cleanup, but S&P downgraded the outlook on poll results minimizing the mess.
