Macro Monthly – What Difference Do April Sanctions Make? – April 2018

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Sanctions game-changer. The 6 April US sanctions were something of a game-changer as they targeted some oligarchs and their businesses. Investors and businesses are likely to adopt a more cautious approach to Russia for some time until the risk level is better understood.

Waiting for a response. A Duma committee is debating retaliation measures, which it wants the President to act on. But comments from Administration officials suggest a much more cautious approach and a wish to avoid any actions which would hurt the economy.

Reducing some forecasts. Because of the expected negative impact from the 6 April sanctions and the slow start to the economy in Q1, we have made changes to our macro-forecasts for 2018-20. GDP growth is cut to 1.6%, from 1.8% previously.

Ruble will be a little weaker and rates a little higher. The Central Bank is expected to be more cautious at its 27 April policy meeting and will likely delay the next rate cut to better assess the impact of sanctions. The ruble is now expected to trade in the low 60s range vs. the dollar. The government appears happy with a weak ruble over the medium term, as it creates a more competitive backdrop for the economy.

Oil is trading higher. The price of oil continues to edge higher as traders ignore President Trump’s criticism of OPEC. Russia and OPEC appear set to agree to cooperate in some fashion into 2019 and US shale output has grown more slowly. The higher oil price will generate a US$20 bln budget surplus this year and provide more options for the government to boost activity and to bail-out some companies.

Waiting for changes. There was little in the way of surprises in the presidential election. Putin will be inaugurated in early May, and the new government should be announced in the weeks following. There is plenty of speculation and jockeying for positions taking place.

SPIEF in focus. This year’s SPIEF will provide President Putin and the government ministers a platform to clarify any sanctions response and policy priorities. This year there will likely be close attention paid, by the government, as to who attends and who stays away.

Local disasters. A major shopping center fire claimed 64 victims, and there were demonstrations against waste disposal policy in the Moscow region, revealing weakness in local government. This is likely to continue as Putin prefers to centralize in response to disasters.

Capital markets hit badly. The April sanctions led to a steep fall in equity indices, with investors shunning names either directly targeted or now seen to be at risk, if there are any more sanctions