Sanctions and surging tensions over Syria have hit Russian markets hard. For now, that is obscuring the relatively solid economic fundamentals that have made Russia an emerging-market favorite in recent months. Those fundamentals should count in the end, but for now, risk aversion is driving the market.
The market moves are sharp. The ruble has fallen 10% against the dollar this week, and President Donald Trump’s tweet Wednesday warning Russia that U.S. missiles “will be coming” to Syria pushed the currency to 65 against the dollar, its lowest since late 2016. Russia’s 10-year bond yield has risen 0.5 percentage point to 7.5%, according to FactSet, and the dollar-denominated RTS stock index is down 13% since Friday.
On sanctions, Russia has been here before. But the latest round targeting oligarchs like Oleg Deripaska and companies like Rusal, the world’s second-largest aluminum producer, cut deeper and have raised fresh uncertainty about what further measures the U.S. might impose. The risk is that Russian companies become further cut off from international financing. That would limit growth, but with just $13 billion of corporate foreign-currency debt maturing in 2018, according to TD Securities, it wouldn’t cause a crisis. Longer term, Russia’s total central-bank reserves cover 85% of the country’s external debt, both public and private, emerging-market fund manager Ashmore notes.
Still, there is the risk of market disruptions related to the flow of Russian payments through international banks or lower liquidity in internationally traded Russian assets. A potential clash over Syria is just adding to the list of worries investors face.
That is a bigger problem than the Russian economy, which is healthier than in the past, when sanctions coincided with low oil prices to create real economic trouble. Since then, Russia has built credibility by running tight monetary policy—including raising rates to 17% in late 2014—bringing inflation down, and adopting conservative macroeconomic policies. Government debt is low, at 13.7% of gross domestic product, according to Moody’s, and the country runs a current-account surplus.
Russia’s attractive yields and solid monetary policy made the country a hot destination for foreign investors, who held more than one-third of domestic Russian government bonds in March. The trade was rewarding in a yield-challenged world, and allowed investors to ignore the building geopolitical storm.
But now, cheaper valuations for Russian stocks, bonds and the ruble face a big offset in geopolitical risks. With tensions mounting almost daily, it may take awhile for investors to feel confident that returning to Russia is the right bet.
Write to Richard Barley at richard.barley@wsj.com
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