New sanctions to weigh further on Russian economy

New sanctions to weigh further on Russian economy

On Tuesday 29 July 2014, the European Union and the US introduced new sanctions on Russia. We believe these new sanctions will worsen sentiment towards Russia's financial and oil sector but not influence directly unsanctioned sectors such as agriculture or retail. We also emphasise that currently the new sanctions do not affect any payments or cash management operations with Russian banks where those payments and operations are not related to new debt or equity issuance by sanctioned entities.

We think that uncertainty among Russian companies that co-operate with Western peers could increase and affect investment and consumer goods imports to Russia. Together with tightening monetary policy by Russia's central bank, the new sanctions could push up prices for loans and decrease their availability to both Russian corporations and private consumers as the state-owned banks have the largest share of the banking system in Russia. If the situation escalates further, we cannot rule out the possibility of more cuts to Russia's sovereign debt rating. On 25 April 2014, Standard & Poor's (S&P) cut Russia's sovereign debt rating to 'BBB-' from 'BBB', preserving its negative outlook. This is just one notch above junk level.

Czech central bank sees anti-inflationary risks

In line with expectations, the monetary policy setting meeting in the Czech Republic this week didn't bring any change to interest rate setting (given that the key policy rate is at technical zero of 0.05%) and at the same time the CNB kept the cap on the Czech koruna (CZK) "near" 27/EUR. Despite changing nothing there, but the statement made by the CNB Governor Singer and also lowering bank's inflation forecast was perceived as dovish by the markets, which sent the EUR/CZK above 27.6. Even though the Governor Singer said at the press conference that there is not major debate on moving the koruna cap higher, we actually think that the debate about lifting the floor has strengthened over the past few week as the central bank is being asked more often by the media and journalists. We find the start of the debate and questions about possible lifting of the EUR/CZK floor higher completely in place given the strengthening anti-inflationary risks in the Czech Republic and in all Europe. Despite, the CNB is still very far from acknowledging the need for more monetary easing and hence weakening the CZK more aggressive, in our view the probability that the CNB will be forced to do it if it should refrain from deflation, which is already in Hungary and Poland is facing imminent deflation, is fairly high. However, for now the CNB only postponed the koruna cap exit into 2016.