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What You Have to Know about New Bill on Russia’s Sanctions

What You Have to Know about New Bill on Russia’s SanctionsThe House of Representatives overwhelmingly passed a bill giving Congress the power to block any effort by the White House to weaken sanctions on Russia, offering a direct challenge to President Donald Trump's authority.

The vote was 419-3. The legislation moves to the Senate for approval, but it seems inconceivable that the Senate will not now approve the House bill, given the huge majorities already seen in support of tighter sanctions on Russia already in both houses. Once approved by the Senate, the bill will go to President Trump for final sign off. And therein also, and despite Trump’s own “special chemistry” with President Putin, in the context of the Russia-gate scandal now engulfing the Trump presidency it seems inconceivable that he would risk battles with Congress by not signing this bill into law, when he likely needs to expend any remaining political capital trying to secure some much needed “wins” on his domestic policy reform agenda, including reform of Obamacare. A presidential veto would in any event likely only delay the adoption of the Russia sanctions bill given that Congress would then only look to override the presidential veto in a follow-up vote.

Whichever way to look at this, this is bad news for Russia. One can argue about the strength of the specific sanctions, on sectors, companies or individuals, but merely by being put in the same basket as Iran and North Korea, these sanctions will impart significant and further reputational damage on Russia, as some investors will want to think again before committing long-term investment in Russia. And critically by codifying these sanctions they likely ensure that these sanctions remain in place for decades to come, unless we see an about turn in terms of Russian policy towards the USA, the West and the near abroad – which under Putin seems unlikely. So sanctions will remain in place for a long time, and they will likely deter foreign investment into Russia – at a time when Russia is desperately in need of that investment. After three years or more of conflict with the West, military intervention in Ukraine and Syria (and before that Georgia), and sanctions, plus arguably 18 years of largely failed economic policies (at least at the micro level – macro policies have been much more prudent/orthodox and successful) under Putin, the Russian economy faces stagnation. Sanctions will just further sap longer term investment into Russia, and with it growth, and will further capital flight and the brain drain out of Russia. They will serve to further the isolation of Russia, from the West, and further the stagnation of the Russian economy which has been the key theme playing out over the past few years.

So far the market reaction to the latest sanctions iteration has been muted. This might reflect an erroneous assumption that Congress will ultimately not agree to this sanction bill, or that Trump will ultimately veto it. It might also reflect the fact that the assumption is the short term impact will be limited – and reflective of the fact that Russia has shown some durability (at least in terms of macro balances) against sanctions lobbied thus far – albeit there has been a discernible impact on growth. Also, as some analytics say, in credit markets there is an assumption that sanctions will not be extended to secondary trading, while restrictions on new debt issuance will continue to provide a technical underpinning to markets, by limiting new supply. Short term this underpins credit spreads, and acts to stabilize Russian markets, but does not help the long term growth story.

This sanguine mood might change depending on the result of the report slated to be produced within 180 days by the UST and National Intelligence over the impact of expanding sanctions to include sovereign debt and derivative products. Any extension of sanctions to the secondary trading of Russian sovereign debt would likely produce an extreme market reaction – albeit that said, it is still expected that Secretary Mnuchin to veto the adoption of any such measures at this point given Trump’s own well-stated views on Russia – notwithstanding any further escalation from Russia itself. But this still does create a risk of something more extreme.

Perhaps more importantly in terms of market reaction will be how Russia responds to the approval of the latest Russian sanctions bill. Therein Moscow is promising tough, albeit not asymmetric measures. It might be mindful not to risk a further tit for tat on the sanctions front, which would likely only hurt the Russian economy further. It would also be mindful of not wanting to further undermine potential allies remaining in the White House and in the Trump administration. But a fair question now must be whether the Putin administration sees any hope that these allies can deliver anything positive towards Russia, and that rather Moscow must now be seen to show strength in response to this affront to its status by the DC establishment. The risk perhaps now is that Moscow opts to go back on the geopolitical offensive, with the risk of new stresses in relations with the West around flash points in Ukraine, Syria, Libya and even North Korea. Likely all this would just take US/Western-Russia relations to new lows still, and with the risk of yet more sanctions on Russia, causing even more damage to the Russian economy.

At the mean time, as Bloomberg reported, Russia threatened to retaliate against new sanctions passed by the U.S. House of Representatives, saying they made it all but impossible to achieve the Trump administration’s goal of improved relations. The measures push U.S.-Russia ties into uncharted territory and “don’t leave room for the normalization of relations” in the foreseeable future, Russian Deputy Foreign Minister Sergei Ryabkov said Wednesday, according to the Interfax news service. Hope “is dying” for improved relations because the scale of “the anti-Russian consensus in Congress makes dialogue impossible and for a long time,” Konstantin Kosachyov, chairman of the international affairs committee in Russia’s upper house of parliament, said on Facebook.

Trump will sign the law because “he’s a prisoner of Congress and anti-Russian hysteria,” Alexei Pushkov, a senator in Russia’s upper house of parliament, said on Twitter. The sanctions represent “a new stage of confrontation,” he said. Russia has prepared “economic and political measures that will be adopted if the Senate and Trump support the bill,” said Vladimir Dzhabarov, deputy chairman of the international affairs committee in the upper house, the RIA Novosti news service reported. Relations with the U.S. “are at such a low level that we have nothing to lose” by retaliating, he said. Putin said after the meeting in Hamburg that he believed Trump accepted his denial that Russia interfered in the election. Congressional committees and the Federal Bureau of Investigation are examining possible collusion between the Trump campaign and Russia, which Trump has dismissed as a “witch hunt.”

The House vote adds to deepening Russian gloom over prospects for a breakthrough in relations with Trump, six months after he took office pledging to improve ties with Putin. Russia threatened last week to expel U.S. diplomats and seize embassy property in Moscow after Ryabkov failed to gain agreement at talks in Washington for the return of Russian diplomatic compounds taken by the Obama administration in December in response to the election hacking.

Sergiy Korsunskyi
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