Russia Stocks Are Trump Trade Gone Wrong as Sanctions Risk Grows

  • Benchmark Micex Index has retreated 20 percent since January
  • U.S. Senate signals it’s ready to extend penalties on Russia

Russian stocks headed for their biggest slump in 17 months after the U.S. senate signaled it’s ready to expand sanctions against the Kremlin.

The country’s benchmark Micex Index dropped 3.3 percent by 3:13 p.m. in Moscow on Thursday, extending a decline since a record high reached in January to more than 20 percent. The Senate voted overwhelmingly to add the Russia measure to a bill sanctioning Iran amid a probe into the Kremlin’s meddling in last year’s presidential election. A 2.9 percent drop in Brent crude this week has also contributed to declines.

Optimism earlier this year that U.S. President Donald Trump would improve battered relations with Russia has fizzled amid an escalating scandal in Washington over his ties to the Kremlin. Congressional committees and the Federal Bureau of Investigation are examining the Russian interference in the election and whether there was any collusion with President Donald Trump’s campaign.

“Any speculation about the expansion of sanctions pushes foreign investors to cut their Russia holdings,” said Vladimir Vedeneev, chief investment officer at Raiffeisen Capital Asset Management in Moscow. “The hope that Russia’s relationship with the West will improve is completely gone.”

The bill requires the administration to explain any moves to ease or lift sanctions, and create a new mechanism for Congress to review and block any such effort. It also proposes adding additional restrictions to banks’ and energy companies’ ability to raise capital, and allow for new sanctions on state-owned entities in the rail, shipping, metals and mining sectors, as well as energy pipelines.

Russian local-currency debt also retreated, with the yield on five-year notes climbing four basis points to 7.86 percent. The cost of insuring Russian sovereign debt against default advanced four basis points to 162 basis points, the highest since April 21. The ruble weakened 0.2 percent to 57.56 versus the dollar.

The draft doesn’t include restrictions on sovereign debt or derivatives, but orders a report on what impact such limits might have. Bond investors surveyed by Bloomberg earlier this week said the new restrictions won’t have much impact on Russia’s debt markets and the ruble unless they restrict foreign traders from buying sovereign bonds.

Tougher Russia Sanctions Measure Moves Ahead in U.S. Senate

The Trump administration is reviewing the Senate measure, according to a White House official, who asked for anonymity to discuss internal deliberations. Secretary of State Rex Tillerson suggested Tuesday that the administration might oppose the Russia sanctions amendment.

President Vladimir Putin said on Russian television on Thursday that the U.S. has no reason to expand sanctions against Russia and the discussions are linked to U.S. domestic politics.

“Whatever optimism there was, we are back to square one,” said Anastasia Levashova, a fund manager at London-based Blackfriars Asset Management. “This shows that the U.S. political elite does not see political benefits in improving relations with Russia.”

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