Russia came creeping back on the market’s radar screen Thursday, first due to new sanctions announced Wednesday by the United States and European Union and later due an incident involving a Malaysian Airline jet that crashed near the Russian-Ukraine border.
Late Wednesday, the U.S. Treasury released a statement, saying, “In response to Russia’s continued attempts to destabilize eastern Ukraine and its ongoing occupation of Crimea, the U.S. Department of the Treasury today imposed a broad-based package of sanctions on entities in the financial services, energy, and arms or related materiel sectors of Russia, and on those undermining Ukraine’s sovereignty or misappropriating Ukrainian property.”
The European Council also ordered tougher sanctions against Russia and unveiled a new set of six restrictive measures.
These include the suspending of new financing operations in the Russian Federation by the EIB and the need for member states to “coordinate with the European Bank for Reconstruction and Development to adopt a similar position.”
“The Commission will reassess and potentially suspend the implementation of EU bilateral and regional cooperation programmes with Russia,” the EU leaders said.
Just as UK and eurozone players were heading home, the market was roiled by headlines that a Malaysian Airlines Boeing 777, en route from Amsterdam to Kuala Lumpur, crashed in Ukraine near the Russian border, after purportedly being hit by a missile.
The news prompted safe-haven demand across the board, with U.S. Treasuries and German Bunds soon in hot demand.
Ten-year German Bund yields fell to a new 14-month low near 1.148%, taking out the lows near 1.152%, seen May 2, 2013.
Bund yields posted record low yields around 1.127% June 1 and July 23, 2012, one analyst noted.
Ukraine and Russian officials pointed fingers accusingly at each other as to the cause of the incident, which also weighed on yields.
Russian stocks and the Russian ruble tumbled as a result of the new sanctions. Later, the plane incident prompted new ruble selling.
Russia’s MICEX closed down 2.31% at 1,440.63, which puts the index about 6.0% from the year’s high of 1,531.99, seen July 8. At one point earlier, the index was down 3.1%.
At Thursday’s close, the MICEX was down 4.2% year-to-date.
Dollar-ruble last traded around Rub35.1682, after holding in a range of Rub34.6748 to Rub35.2379).
The earlier high was the highest level seen since June 4, when the pair peaked just shy of Rub35.2500.
The life-time ruble low versus the dollar was seen at Rub36.9029, on March 3, at the peak of what was then escalating Ukraine-Russia jitters.
Dollar-ruble earlier broke above its 55-day moving average, currently at Rub34.5336, for the first time since early May, which was deemed bullish.
Euro-ruble last traded at Rub47.5607, on the high side of a Rub46.8882 to Rub47.6635 range, but well down from the life-time cross high (ruble low versus euro) of Rub51.1095, seen March 14, ahead of the Crimea Referendum.
Morgan Stanley strategists recommended positioning for more RUB weakness, but said “there are several mitigating factors which may mean the sell-off does not maintain its current pace.”
First, “Oil prices have adjusted higher, while the Central Bank of Russia may play a greater role in stabilising the exchange rate – as was the case in prior periods of volatility this year,” they said.
In addition, the RUB basket (40.42) is still around 2.3% from the edge of the no-intervention zone (41.35) and 7.4% from the edge of the corridor (43.4), at which point interventions become a more significant variable in capping RUB weakness,” the strategists said.
Because of this, it will take “more ad-hoc actions for the CBR to stabilise the market, though this cannot be ruled out,” Morgan Stanley said.
“It will also be important to see the extent to which the CBR extends safety credit lines to reduce any potential near-term funding challenges for sanctioned companies,” they said.
The U.S.-EU financial sanctions announced against Russia “will effectively cut off access to Western capital markets for medium-and long-term financing,” said Carl Weinberg, chief global economist at High Frequency Economics in Valhalla, NY.
The market should be thinking about what the Russian response will be, he stressed.
“The hard response no one is talking out loud about is the chance that Russia could suspend payments on its $730 billion in foreign debt,” Weinberg said.
The clock would start ticking on a 90-120-day period (depending on regulator), “after which banks and other creditors would have to declare those loans to be non-performing and charge the principal against loan loss reserves,” he said.
This could wreak havoc in the eurozone’s “already troubled banking system” and effect other global banks to a lesser degree, Weinberg said.
An ITAR-TASS report Thursday quoted Central Bank of Russia Deputy Chairman Mikhail Sukhov telling reporters, “We have enough tools to work with banks to make the liquidity of credit institutions sustainable. I do not see any probability of a situation where the liquidity of these organizations plummets. The central bank has enough instruments at its disposal to cope with this situation.”
The 30 largest bank’s capital adequacy will not be affected if they incur losses up to 1 trillion rubles ($28.5 billion), Sukhov said, according to the report.
Another ITAR TASS report quoted the head of advisory firm Creon energy saying that the new Western sanctions will inflict “at least $150-$200 billion of losses upon the Russian energy industry.”
President Obama spoke with Russian President Putin earlier Thursday about the situation in Ukraine and the additional sanctions on Russian individuals and entities that the United States announced on July 16.
President Obama emphasized that he remains committed to a diplomatic solution and that sanctions were not his preferred course of action.