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Risk of more sanctions

Periodically we see a major sell of sell off on the Russian stock market, and April 2018 goes down as one of the most troubled months ever.

Expanded US sanctions caused the stock exchange and the Russian rouble to fall steeply. These new sanctions are targeted at three listed companies – Rusal, EN+ and Gaz Auto, all part of oligarch Oleg Deripaska’s empire. Deripaska has been identified by the US Russian investigation and is the main target of the sanctions, which make it more or less impossible for international investors and companies to have anything to do with the businesses.

Consequently, they fell very steeply on the stock exchange and all shareholders were naturally affected. Carnegie Rysslandsfond does not own shares in any of Deripaska’s companies, but still fell as a higher risk premium impacted the entire stock exchange. A strong oil price then led to some recovery, but mainly limited to this one sector.

In addition to the sanctions, the stock market also suffered from increased concern about developments in Syria. Relations between Western countries and Russia further deteriorated following a poison gas attack and a US-led missile strike.

The rouble fell sharply during the month as a consequence of a higher risk premium, and despite rising oil prices, which is unusual since the rouble is usually correlated with oil prices. The weak rouble led the Russian central bank to suspend its interest-rate reduction cycle. The bank also says that it is worried about increased geopolitical risks, and that it expects inflation to rise to its four percent target earlier than forecast.

The intensification of sanctions now naturally increases the risk of delays to any recovery in the Russian economy. There is reason to follow developments very carefully. The risk of Russian counter-sanctions is of course high, but I cannot really see that they could have serious effects. However, additional US sanctions, perhaps against other large Russian companies, could have very serious consequences for Russia’s economic development.

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Carnegie Rysslandsfond invests in equities listed in Russia and in other parts of the former Sovjet Union. The region has great natural resources as well as many excitingcompanies in newer...

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