Ash: “Moscow…efforts to ‘support’ the Trump presidency failed…quite spectacularly”

2017/8/3 13:53:03

Does Putin see, or raise the stakes, in response to sanctions, or "fold" and look to offer some form of concession. Putin's track record is that he only respects strength, and expects others (the DC security establishment which he inevitably respects) to view things from the same lens as himself. Let's see how this pans out.










LONDON, Aug 3, 2017 – Following President Donald Trump’s signing into law of a strong Congressionally-mandated bill on sanctions against Russia, Iran and North Korea, Bluebay analyst offered the following comments at 12:53 today:


Interesting to see Medvedev’s rant yesterday in response to Trump finally signing the new US Congressional Russia sanctions bill into law – he seemed to be losing it a bit, talking of the US engaging in a trade war with Russia. As if Russia is a trade competitor in any meaningful sense to the US given the huge divergences in terms of the size of the two economies (the US is thirteen times larger) – perhaps it could be said to be the case in the defence field, given that Moscow recently sold S400s to Ankara. And clearly the US and Russia are staunch geopolitical rivals – again.


The rouble has wobbled a bit – driving back thru 60 against the greenback, and despite new found resilience in oil prices - on the back of the sanctions announcement. This is a bit surprising given that the sanction bill has been doing the rounds for several months, and it cannot be surprising to anyone that Trump was forced to sign this into law – Moscow surely was misreading DC so badly if it thought that Trump was in any position to veto this. So no one can really be surprised now that Russia sanctions have been codified. I guess the plus is that after lobbying by the Europeans and also by the Trump team/executive the more aggressive/unpalatable aspects of the sanctions bill have been moderated. But I guess the market was un-nerved by the harshness of the comments from Medvedev, with some real venom showing there towards the US establishment – so much for Medvedev as the “liberal”, reform minded version of Putin, which had been the spin a few years back, and during the Medvedev/Putin job switch during Medvedev’s one term as President.


I guess the market is now worried about a potential Russian reaction – with further retaliatory sanctions which could end up in a sanctions tit-for-tat, but inevitably weakening an already weak Russian story. Therein I think we will have to await Putin’s return from vacation – more bareback endeavours in the wilds no doubt. He was reasonably conciliatory last week, albeit the decision to slash the US diplomatic mission in Moscow took many by surprise, but in the end will more likely just further hurt Russian interests.


Perhaps the rant from Medvedev is a final realisation that this latest sanctions iteration from the US is really bad news, long term for the Russian economy. Indeed, whereas I think many people had downplayed earlier sanctions iterations from the West on Russia thus far – seeing these as more as more for signalling displeasure over Russian actions than for real effect. I had in fact rated them 3/10 for severity, if sanctions on Iran are a 10. And I think there was some comfort therein from Moscow, plus the understanding that rolling EU sanctions would be difficult in practice given differences amongst the EU28, and that an executive order, only, was required to pull any such sanctions. But now Russia faces the codification of sanctions – which suggests they will be hellishly difficult to take off and are likely to remain in place for the very long term. Medvedev’s comments suggested that Moscow finally realises this – and also that this will badly damage the Russian economy over the longer term, both in terms of specific sanctions impact but also what this says of the geopolitical state of the relationship between Russia and the West. This is bad, and at risk of getting worse – as noted by Tillerson, Medvedev, at al. And in understanding the impact of Western sanctions, it is not only the specific restrictions on particular activities, but the general message/signal it sends Western business about doing business in Russia. The mere fact that the US and Western governments have saw fit to levy sanctions on Russia sends at the least an amber light to Western business – be careful in your dealings with Russia. They have been levied because of strains over Ukraine, but also because of the difficult geopolitical relationship, which can get worse still from here, and which can end up ensnaring Western business in Russia – through either future Western sanctions iterations, or the risk of a Russian counter-response. Now this likely has a marginal impact on portfolio investors, where investments are generally mobile – unless Russia responds with capital controls, or secondary trading in Russian assets is sanctioned (albeit note the report now expected by the UST as per the Congressional sanctions bill over the impact of such actions). But for foreign direct investment (FDI) – so desired by Russian policy makers – those foreign companies looking to buy/locate physical assets in Russia, I think the latest sanctions iteration will make such investors think very hard about whether to commit to Russia. Many will likely review/delay or even halt such investments, pending further clarity on the state of relations between the West and Russia. Given the still slow pace of development/stagnation of the Russian economy, and the political cycle itself in Russia, with presidential elections due next year, this will surely represent a major blow to President Putin and his supporters.


Inevitably there will be concern now over potential Russian retaliation, against the West, in the form of counter sanctions, or perhaps by new foreign policy/military initiatives elsewhere. Ukraine is an obvious flash point, and the summer has tended to be prime time for Russian re-escalation in the Donbas. But we have already seen that this year – with a major upsurge in the conflict in the East, perhaps at an intensity twice that of the year earlier period in terms of DIA/WIAs. Moscow could further escalate – albeit risking more casualties to itself, which might still be unpalatable in the run up to a yet quite challenging election campaign looming in Russia. Would Putin want to take more risks there, and meanwhile, when a debate is again brewing in the US over arming Ukraine with defensive military capability – note therein recent comments by Kurt Volker, Trump’s recently appointed representative to talks over the crisis in Ukraine. Cynics might say that the upturn in public announcements in the US again about arming Ukraine, might have been a conscious strategy from Washington to warn Moscow off, and to call for a dialing-down already high level intensity of conflict in Eastern Ukraine.


Moscow must now be realising that all the efforts to "support" the Trump presidency failed, and quite spectacularly. Indeed, whether or not you buy into the thesis that Russia meddled in the US election in favour of Trump, it is clear that Moscow has been spinning favourably for Trump, both in the run up and aftermath to the US election. But Russia now faces a DC establishment which is smarting over the assumption of Russian meddling, and is now much more hawkish and anti-Putin than likely even would have been the case under a HRC presidency. Over the past week we have seen a further cleansing of Russia doves in the US administration, furthered by John Kelly's appointment to the WH. This seems to be weakening the positions of Bannon, Kushner, et al, and all making an early rapprochement with Russia that much more difficult. Russian policy has backfired spectacularly - and while Moscow might have been taking some solace from the soap opera Trump WH under Scaramucci, et al, Kelly's entrance seems set to raise the prospect of a reset in the US administration, but decisively away from Russian interests. 


Moscow now faces a dilemma as to how to play this new iteration in the US administration. Does Putin see, or raise the stakes, in response to sanctions, or "fold" and look to offer some form of concession. Putin's track record is that he only respects strength, and expects others (the DC security establishment which he inevitably respects) to view things from the same lens as himself. Let's see how this pans out.




** Please note that any views expressed herein are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions. The views expressed do not reflect the opinions of all portfolio managers at BlueBay, or the views of the firm as a whole. In addition, these conclusions are speculative in nature, may not come to pass and are not intended to predict the future of any specific investment. No representation or warranty can be given with respect to the accuracy or completeness of the information. Charts and graphs provided herein are for illustrative purposes only.”

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