The Daily Update - Looking East

President Trump signed into law the U.S. government's Countering America's Adversaries Through Sanctions Act on August 2. This gives President Trump the power but not the obligation to impose sanctions not just on Russia but also North Korea, Iran and it also requires Congressional approval to remove them.

However, the US desire to use sanctions as a cornerstone of foreign policy has been met with a mixed global response. For example, European officials although having their own set of sanctions in place against Russia (that has recently been extended to January 2018) were said to be angered by the latest US sanction move and its potential to negatively impact European interests. Europe is a large gas importer from Russia: Gazprom supplies 34% of Europe’s energy needs and European companies have a significant pipeline of investments in energy and pipeline related projects. Although, the EU President Claude Juncker noted after the initial uproar: ‘if the Americans proceeded [with the adoption of new sanctions], we would be ready to react adequately in a matter of days. As a result, a significant proportion of the intended sanctions against Russia have been dropped. Moreover, the US Congress has now also committed to only apply sanctions after the country's allies are consulted. And I do believe we are still allies of the US’.

Another example was earlier this week when the US found it had to water down its proposed UN sanction package against North Korea in order to avoid a veto by Russia and China who were against an oil embargo and emphasised the importance of diplomatic negotiations to resolve the dispute. ‘Bill Richardson, the former US ambassador to the UN summed the situation up saying ‘better than nothing, but not enough to really pressure North Korea.’

Earlier in the month, President Putin while condemning the actions of North Korea as provocative noted at his BRICS Summit press conference: ’Sanctions of any kind are useless and ineffective in this case. As I said to one of my colleagues yesterday, they will eat grass, but they will not abandon this programme unless they feel safe.’ He was adamant that ‘Diplomacy is the only way to solve the North Korean nuclear problem’.

The issue is that sanctions are not always an effective tool.  For example, Russia has been able to weather the sanctions relating to the Ukraine debacle as it did not have a large amount of foreign debt outstanding and had an NFA position of +14% in 2012 (before the sanctions were imposed in July 2014): hence it was able to use its own sizeable buffers to meet its funding needs.  Plus, Russia also benefited from a having a flexible exchange rate to offset the ‘double whammy’ of weaker oil prices hurting government revenues.

Russia has also been pragmatic in looking to access capital from China and Asia offsetting some concerns that sanctions would hurt FDI. One of Russia’s competitive advantages is its large energy reserves which China is short of and thus there is plenty of scope for China and Russia to continue to work together.  For example, in 2014 Gazprom signed an USD400bn supply deal with CNPC in China to deliver 38bn cubic metres of gas per annum for 30 years from 2018. This week, the China Energy Company (GEFC) announced a deal to purchase a 14.16% stake in Rosneft from the Qatar Investment Authority and Glencore which sold down their 19.5% stake to 5.34%. This follows on from Rosneft and CEFC signing a strategic co-operation agreement earlier in the year for exploration and production and also downstream activities such as refining, petrochemicals and oil and petroleum product trading.

President Putin noted at the plenary meeting of the Eastern Economic Forum in Vladivostok in early September ‘We are open for deeper investment, trade and financial ties with all partners, both from the eastern and western coast of the Pacific Ocean, especially considering that investment opportunities in Russia's Far East are truly immense.’  We think Russia should be given some credit for being quick to look to the future and ‘look east’.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.