First, relief that the latest sanction iteration was not worse, and did not extend to existing debt/equity holdings, only future long term financing.
The line perhaps – if this is the worse you can do from a market perspective, “bring it on.”
Herein there is an underlying sense that the West still does not really want to bite the bullet and roll out a meaningful sanctions regime – it has the tool kit to hurt Russia, but would rather not for fear of the collateral damage back to its own business interests.
Second, with limited prospects for new debt/equity issuance there is a sense that outstanding issues will aquire a rarity value now – there will simply be fewer Russian assets to buy, and investors might eventually be forced back into the trade.
Third, all this comes as we are still experiencing exceedingly flush global liquidity conditions and investors are in a feeding frenzy for emerging market assets. In recent weeks as uncertainty has risen over Russia, investors have been squeezed into everything else, and this has pushed out the spread on Russia, making them attractive despite the geopolitical risks.
Fourth, and related to the above, many investors see underlying fundamental value in Russia – if you close your eyes and forget about Ukraine, sanctions, and the deterioration in the relationship with the West, and concentate on key ratios either at the sovereign or corporate level. They would argue that ultimately it is all about ratios.
Fifth, there is just a glimmer of hope now about this potential Minsk peace process between Russia and Ukraine, brokered by President Alexander Lukashenko. If Russian President Vladimir Putin wants a face-saving way out, surely this now is his last chance.
Perhaps the above will hold off a further sanctions iteration for the time-being, and create a short term window of opportunity for markets. But the Minsk talks are now probably key in determining the next move.
Timothy Ash is a senior analyst of emerging markets for Standard Bank in London.
