Russian rouble: warning shots of US sanctions ‘bill from hell’

On 8 August 2018, the Russian rouble saw an intraday drop of 2.7% against the USD and 2.4% versus the EUR as the full text of the US sanctions ‘bill from hell’, introducing harsh anti-Russia sanctions, was leaked to the public through the Russian media (Kommersant).

While the bill urges to fortify NATO and coordinate anti-Russia sanctions better with the EU, it calls for the US President to impose new sanctions on Russian political figures, oligarchs, certain parastatal entities (including investments in energy projects) and financial institutions.

If the bill becomes law and Russia retaliates, we estimate that USD/RUB could move to 72.00, while EUR/RUB could hit 83.50, as any major selloff of Russian local debt, local credit and stocks would amplify outflows from the RUB.

Assessment and outlook

Last week on 2 August 2018, a group of six US Senators from both the US Democratic and the US Republican parties introduced draft legislation called the ‘Defending American Security from Kremlin Aggression Act of 2018’, which was named a “sanctions bill from hell” by US Senator Lindsey Graham. While the full text of the document was not available to the public before 8 August, the markets reacted calmly to the press release by the US Senators, as no details were published. However, the published document listed possible sanctions and targeted Russian entities, causing a major selloff in the RUB and other Russian assets.

The bill introduces sanctions against new production of crude oil in Russia and prohibits transactions with Russia’s new sovereign debt, imposing additional sanctions (e.g. freezing property in the US) on the following seven largest Russian banks, where the Russian state plays a significant role:

• Bank of Moscow
• Gazprombank
• Promsvyazbank
• Rosselkhozbank
• Sberbank
• VEB
• VTB

As some of the targeted banks are listed domestically and/or internationally, whose debt has also been held internationally, additional sanctions against them could trigger a large selloff of their securities, weighing on the RUB with accelerating deterioration in sentiment towards existing Russian sovereign debt. Yet, the bill prohibits transactions with new bonds issued by the Bank of Russia (CBR), the National Wealth Fund and the Federal Treasury of Russia with a maturity of more than 14 days, FX swaps with the entities and maturity mentioned above. The bill also extends limitations on imports of uranium to the US from Russia.

The bill suggests the designation of Russia as a ‘state sponsor of terrorism’, which could lead in the future to the introduction of Iran type sanctions against the country, we believe.

However, given the US dependence on certain Russian aeronautical and space industry products and services, the bill makes an exception for collaboration of the US National Aeronautics and Space Administration with Russia in those fields, mentioning the use of Russian rocket engines. Russian oil exports are not mentioned in the bill. If the bill becomes law, Russia’s possible retaliation could accelerate the RUB’s selloff, depending on any limitations introduced.

What is next?

We believe that the probability that the bill will be passed and the new sovereign debt will be sanctioned is much higher than it was during similar discussions in early 2018 (please, see our note The Kremlin report released by the US Treasury: one step towards new antiRussia sanctions, 30 January 2018), as both US parties support the current bill. The pressure on Russia by the US legislators is highly likely to increase on the approaching mid-term elections in the US in November 2018. The pressure on US President Donald Trump to sign the bill into law is also highly likely to increase, in our view.

With regard to the schedule, more news on the bill should come after 3 September 2018, as the US Senate has a ‘State Work Period’ during 6 August-3 September, meaning no legislation until congressmen are back in Washington in the first week of September.