European markets Wednesday showed a subdued reaction to the U.S.
and the European Union adopting tougher economic sanctions against
Russia, suggesting that investors had largely positioned for the
latest measures.
Moscow's Micex and dollar-traded RTS index were both trading
more than 1% higher in early European trade, while the ruble
recovered from an initial dip to trade as much as 0.3% higher
against the U.S. dollar at 35.62.
The U.S. now has sanctioned five out of Russia's six largest
state banks, but even though the measures are expected to sharply
restrict the ability of state-controlled banks such as Sberbank and
VTB Group, to raise capital on European markets, their bonds didn't
show dramatic moves.
Sberbank bonds showed a mixed performance on the day, while
Russian government bond yields fell marginally, according to
Tradeweb data. Russia's dollar bond due September 2023, for
example, was yielding 4.95%, about 0.02 percentage point lower than
Tuesday's close.
Shares in Sberbank rose 1.5% in early trade, while shares in
VTB, which relies heavily on foreign-debt financing, lost 1%.
Barclays economists wrote in a note to clients that the
sanctions by both the EU and the U.S. appear to have been "widely
anticipated by markets."
They do highlight, however, that market issuance of Russia banks
and companies--having been light since around the end of
January--has ground to a complete standstill more recently. The
latest sanctions news, they say "can only add more pressure to an
already challenging operating and financing environment."
The cost of ensuring Russia's government debt against default
fell marginally Wednesday. It now costs an average of $227,000 a
year to insure $10 million of Russian debt for five years, roughly
$4000 less than on Tuesday, according to Markit.
Some of the U.S. sanctions are designed to penalize Russia's
energy sector by restricting the export of technology that could be
used to expand Russia's deep-water, Arctic offshore or shale oil
production. But administration officials said the restrictions were
designed to avoid affecting current energy production
capabilities.
Shares in energy giant OAO Rosneft were also trading higher in
early trade and stock in BP PLC, which owns a near 20% stake in the
Russian state-controlled oil producer, were down less than
0.2%.
Citigroup analysts point out, however, that the full details of
the scope of the sanctions aren't clear yet, particularly with
regard to existing projects in the oil and gas services sector.
"Some of the equipment can be sourced from Asian manufacturers,
and it is unclear if the EU and U.S. sanctions will picked up by
governments in the region or not," the bank wrote.
Derek Halpenny, European head of currency research at Bank of
Tokyo-Mitsubishi UFJ Ltd., similarly noted that full details aren't
expected until later Wednesday and that the possible severity of
them should not be underestimated.
"This latest wave of sanctions certainly appear to be the
toughest yet and given the Russian economy was already on the verge
of recession, these latest measures will likely tip the economy
into a contraction that could turn severe," he said.
Elsewhere, Wednesday is a heavy day for macro economic data
releases with German consumer price data and the U.S. scheduled to
publish ADP unemployment figures, as well as a reading on gross
domestic product for the second quarter.
Later, the Federal Reserve's Federal Open Market Committee is
set to announce the results of its latest monetary policy
meeting.
Ben Edwards contributed to this article
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