Russian Strategy - New Sanctions Announced in Response to Russia-Ukraine Crisis

Following Russia's recognition of the DNR and LNR as independent republics, the EU, UK, US and other countries have announced a series of new sanctions on Russia. The measures announced so far will likely have a minor to moderate impact on markets, in our view, though at this early stage we think investors will be paying more attention to how the measures will alter the structure of the Russian markets than on the potential negative impact on specific assets.> US announced ban on investors participating in new issues of Russian sovereign debt, adding the secondary market to the existing restrictions on taking part in primary market deals. EU and UK officials have made remarks to the media about considering limitations on the debt market, but specific measures have not been announced. The Finance Ministry will cease tapping current on-the run issues after March 1 and will subsequently introduce new on-the-run OFZ series. The OFZ curve will likely get divided into three segments, with bonds issued after March 1 trading 10-15 bps over the older papers. > German government indefinitely halted Nord Stream 2 certification. The halt is obviously not welcome given the sunk cost in the pipeline, but Gazprom is able to meet present long-term supply obligations without it, and high gas prices are more than offsetting implied higher transit costs.> EU, UK and US each put sanctions on a list of banks. The targeted banks have a limited market share and some were already under restrictions. Adding VEB to the US SDN list sets a negative precedent but will have a limited impact on the bank's daily operations, in our view. Meanwhile, the CBR announced measures to support the sector during the spike in volatility. These measures and comments from local banks suggest that banks and the banking system are unlikely to come under severe stress.> Aside from the impact of the halt to Nord Stream 2, the equity market has been left largely untouched by the latest round of measures. The market is trading at its cheapest valuations since 2014, 2008 or even earlier, depending on the metric. However, we think investors are unlikely to scoop up the market until they have reasonable confidence that further geopolitical and sanctions risks will not emerge in the near term. We prefer exporters during periods of escalation and would consider financials in the event that tensions ease.> Investors likely to look for signals of what measures could come later if relations deteriorate further. We summarize the potential restrictions in the US DUSA and NYET bills that could guide later US plans.