Russia’s Designated Selloff Scenario Spread
After a 10% Q1 stock market gain to lead the regional MSCI index while local bond foreign ownership was one-third the total, Russian assets were dumped in the wake of targeted US sanctions against “specially designated nationals” accused of individual and corporate complicity in “destabilization.” The Treasury Department notice freezes personal and securities holdings as of early May for 25 oligarchs and 15 firms, including global heavyweights like Rusal and gold miner Polyus. Commodity markets in turn were roiled as Glencore is a major shareholder in the aluminum giant, and Russia’s near $10 billion in exports of the metal will be slashed. The listing plunged 10% on the Moscow bourse, which was basking in the afterglow of a rare $100 million information technology IPO. Analysts were reluctant to change immediate growth and inflation forecasts which will likely suffer, as the government pledged banking support from almost half a trillion dollars in reserves without specifying amounts after establishing a $20 billion restructuring facility for rescued private sector lenders. The central bank estimates the corporate refinancing gap over the next year at $70 billion compared with the $100 billon during the original wave of Crimea-imposed sanctions, and domestic credit may be better positioned for the slack assuming the knee-jerk ruble slide stabilizes, as Governor Nabulliena indicated with a no-intervention stance, although she did not rule out a short-term rate hike. With Washington’s boycott names could be removed from the benchmark CEMBI and other indices, but sovereign spreads may barely budge after ratings agency action to restore investment-grade. The SDN label has now been extended to mainstream emerging market multinationals at the same time a future ban on government debt purchase as in Venezuela’s case could be considered. The Trump administration has signaled national security over financial market priorities in its positions so far and military engagement in Syria could invite more sweeping prohibitions, analysts believe.
Turkey is also enmeshed in the civil war there and recently recaptured Kurdish-controlled areas it is pressing Syrian refugees to relocate to after claiming $30 billion in host spending since the influx began. President Erdogan has ramped up his rhetoric on this issue and on the economy, where he lauded stimulus-induced 7.5% growth last year, which also swelled the current account hole to 6% of GDP as the lira breached 4/dollar. Despite overheating and political crackdown concerns as security forces round up academics and students, the central bank is under his admonition not to raise rates amid double-digit inflation. State-backed credit was up 40% over the period and another $40 billion package is in the works as banks otherwise retrench their business and personal lines on souring portfolios. Several big corporate borrowers also relying on external debt rollovers have entered rescheduling talks, and the rumored resignation of Deputy Prime Minister Simsek, a former investment banker, could further erode sentiment. Hungary was another populist hot spot in early April after the convincing two-thirds majority re-election of Prime Minister Orban and his Fidesz party. He too campaigned on an anti-immigrant and free spending platform against a weak opposition, and stocks and bonds rallied on the win but not foreign investor positioning at 20% of the total, half the previous take under more optimistic ruling clique embrace.
