Europe’s reliance on Russian gas is a good illustration of the important trading relationship between Russia and Europe. Gazprom estimate they supplied up to 34.7% of the gas consumed in Europe in 2017; Germany is the largest individual market. This it implies Europe’s approach to sanctions is necessarily different to the US. Although it is a different industry, last week the US eased the recent sanctions on Rusal, given the knock-on effects on European businesses, by extending the deadline to October for compliance. US Treasury Secretary Steven Mnuchin commented: ‘Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider RUSALs petition.’
Russian Q3 GDP grew 1.8% yoy which was down from growth of 2.5% yoy in Q2 and slightly weaker than market expectations of 2%. Elvira Nabiullina, the Central Bank Chief, is reported as saying she expects growth to reach 1.8% for 2017 as a whole although the Central bank has been guiding to 1.7-2.2% range, and the Finance Ministry projection has been at the upper end of the range. Moody’s estimate 2017 GDP growth at 1.5%. But all projections represent a significant improvement from GDP growth of -0.2% in 2016.
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.
Recent volatility across asset markets seems to have abated somewhat as befuddled markets appear to be finding their feet; although the future Trump administration policy stance still remains unknown. One thing that does appear to be ‘known’ is the future relationship between the US and Russia. After a phone call yesterday between Trump and Putin, expectations are that the two nations will look to work to normalise relationships, formalise trade agreements and work together to combat international terrorism and extremism. Our guess is that Putin will also look to Trump to ease western sanctions on Russia which are due to be reviewed in January; more recently we have heard that Italy, Hungary, Greece and Cyprus have questioned the effectiveness of the sanctions and are pushing for dilution. Although bonds within the region did sell-off post election announcement, holdings such as Russian Railways 7.487% 2031 and Gazprom 8.625% 2034 have recovered into the end of the US close and today’s trading session; up 2-3 points at time of writing. Both bonds remain attractive, yielding over 6.3%, with sufficient 2-3.5 notch protection and expected returns of 19.4% and 13.5% respectively.
A further round of the Normandy Four talks took place on Monday night between Vladimir Putin, Angela Merkel, Francois Hollande and Petro Poroshenko in another attempt to try and get the Minsk II agreement implemented and to move closer to some sort of resolution of the Ukrainian issue. But if anything, the talks seem to have hit a stalemate of late. Vladimir Putin emphasised “a direct dialogue between Kiev and Donetsk and Lugansk should be a key element in the conflict resolution to achieve a full and comprehensive implementation of the Minsk agreements of February 12, 2015.” The Russian minutes also note that the Normandy Four had received a package of proposals for local elections, special status, amnesty and decentralisation that had been agreed with the DNR and LNR. But the issue remains that elections have not been held yet, the Ukrainian parliament has not devolved power to the separatist regions and Russia sees these as a required steps before it will withdraw its troops and return the border to Ukrainian control.