A ‘New Normal’ For Russia Ushered In By Trump’s Sanctions Reboot

The chill in geopolitics is threatening to turn into a deep freeze for an economy retooling after the crash in oil prices as Russia hunkers down for “decades” of U.S. sanctions.

He assumption that Russia’s future may look much like its past as a petrostate is ensured as U.S. President Donald Trump reluctantly codified the penalties into law. According to Vladimir Miklashevsky, a senior economist at Danske Bank A/, it also marks a shift to a “new normal” that’s all the scarier for being impossible to undo any time soon.

The economy of the world’s biggest energy exporter can’t afford to remain walled off from foreign capital and technology as it is desperate to snap out of an investment torpor after its longest recession this century. According to the World Economic Forum’s Global Competitiveness Report, in terms of foreign direct investment and technological transfer, Russia was rated 111th among 138 nations.

“While on the face of it Western sanctions haven’t wreaked havoc on the Russian economy,” what’s clear is that it’s “become more isolated and has lagged further behind technologically,” said Liza Ermolenko, an economist at Barclays Capital in London. “It remains heavily dependent on exports of oil and gas and this seems unlikely to change any time soon. What’s more, no country in recent history has managed to catch up economically and technologically with the rest of the world by shutting itself off.”

Strengthening punitive measures imposed over Russia’s intervention in Ukraine and its interference in last year’s U.S. election, tBottom of Form

he sanctions legislation gives lawmakers the power to block the president from lifting them. Under Jackson-Vanik, the 1974 Cold War-era amendment had imposed trade restrictions on the Soviet Union for blocking Jewish emigration and endured for four decades, even after the Soviet collapse and the present law gives the measures a similar status.

“Now that the law is signed, it’s completely clear that the situation with sanctions will last a long while,” said Natalia Orlova, chief economist at Alfa Bank in Moscow. “This flavor of sanctions will accompany all business activity with Russia.”

Russia’s currency, bonds and stocks showed signs of recovery this week as oil climbed, after suffering a battering in the past two months. The ruble was among the top performers in emerging markets on Thursday.

Still, Miklashevsky said that especially until the U.S. clarifies its position on whether it might target sovereign debt, “the next half a year will be full of uncertainty and turbulence toward Russian assets”.

The central bank’s forecasts already assumed that sanctions will remain in place in the coming years even while it has pointed to “elevated geopolitical risks” as it paused monetary easing last week. It wasn’t clear if the curbs “will further hamper what we currently regard as only modest medium-term economic growth prospects for Russia”, said S&P Global Ratings.

By allowing its currency to trade freely, keeping spending in check and trying to promote “import substitution”, Russia has become more resilient to external shocks in the three years since sanctions were first imposed.

The deepening standoff risks unsettling investors, is the recognition behind the bluster of some officials. What businesses need the most is “confidence in tomorrow”, Industry Minister Denis Manturov said even as Russia has grown accustomed to turbulence.

“How is it possible to speak of any long-term prospects when everything is unstable?” he said.

(Adapted from Bloomberg)

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Categories: Economy & Finance, Geopolitics, Strategy, Uncategorized

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