Barely a week seems to pass without news of fresh Western sanctions against Russia. Sergei Elkin, one of Russia’s most popular cartoonists, recently captured the mood with a caricature of a hapless-looking Vladimir Putin holding a cell phone to his ear. “To hear more information about new sanctions, press one,” read the caption.
In August alone, America has slapped penalties on Russian shipping firms accused of trading oil with North Korea; imposed restrictions on the arms trade in connection with the poisoning of ex-Russian spy Sergei Skripal in Salisbury; and begun congressional hearings on two new pieces of legislation designed to punish Russia for its interference in elections. Further Skripal-linked measures may follow in three months’ time.
Markets have been scrambling to digest their impact. The greatest threat to Russia’s economy comes from the two proposed bills, the Defending Elections from Threats by Establishing Redlines Act of 2018 (DETER) and the Defending American Security from Kremlin Aggression Act (DASKA). Senator Lindsey Graham, one of DASKA’s six bipartisan co-sponsors, called it the “sanctions bill from Hell”. When details of its contents made their way into the Russian press in early August, the rouble slid to two-year lows (see chart) and the share prices of Russian state banks began falling.
Investors see several reasons to worry. Chief among them are proposed bans on trading new Russian government debt and limits on the operations of state banks. With state-owned lenders accounting for over 60% of the sector, bans on just a few could force a “restructuring of the financial system,” argues Natalia Orlova, chief economist of Alfa-Bank, Russia’s largest private lender. This would be painful, but stop short of the abyss: America cannot impose Iranian-style sanctions—such as banning the purchase of Russian oil and gas—without harmful effects on the global economy.
The Russian authorities, meanwhile, have been taking prudent steps to prepare. “They have both insulated and isolated the economy,” says Chris Weafer of Macro-Advisory, a consultancy. The Russian central bank has dumped or disguised ownership of four-fifths of its holdings of American government debt, following sanctions imposed in April. The government has been funnelling extra revenues from rising oil prices into refilling its National Welfare Fund and building up reserves. And a weaker rouble actually helps exporters, though at the cost of higher inflation.
Yet no policy moves, short of withdrawing Russian forces from eastern Ukraine, can lift the sanctions-created uncertainty that dampens investment and messes up budget planning. Compared with a year earlier, foreign direct investment fell by more than 50% in the first half of 2018. “When the risk is debt, you can build scenarios,” says Ms Orlova. “But when the risk is sanctions, it’s impossible to know.” Many see the peril increasing as America’s midterm elections approach.
The irony is that the risk of new sanctions now emanates not only from Mr Putin, but from Mr Trump as well. His subservience to Mr Putin at a July summit in Helsinki spurred senators to draft the DASKA bill, says Andrew Weiss of the Carnegie Endowment for International Peace. “[The bills] are born out of a deep distrust of the president when it comes to Russia,” a senior senate aide concurs. Even if Russia behaves this autumn, tweets from Mr Trump could well spur their passage.