Emerging Markets: The Week Ahead (Mar 4 - 8), Crimea Punishment Does Little To Deter Russian Economy

By Steven Levine, Senior Market Analyst, Interactive Brokers


The Russian Federation has been recently enjoying a bout of positive economic momentum, with its sovereign credit profile bolstered by improvements in the country’s ability to withstand certain external shocks.

Since 2014, the U.S., the European Union, and certain other countries introduced a series of sanctions against Russia and some of its domestic corporations, including energy giant Gazprom (OTC: OGZPY) and state-owned Gazprombank, in response to Russia’s military intervention in Ukraine and annexation of Crimea.

Among a long list of other actions, U.S. President Donald Trump’s administration in April 2018 implemented new sanctions, including a state-owned Russian weapons trading company, which, according to The White House, had provided military equipment and support to the Government of Syria, enabling the regime’s ongoing attacks against Syrian citizens.

Overall, while the sanctions had taken a toll on the country’s energy sector, to date, certain of Russia’s major oil companies appear to have enough financial and operational health to withstand moderate shocks, amid higher revenues and ongoing deleveraging.

(Click on image to enlarge)

Indeed, the market’s perceived confidence in many of the country’s energy sector firms has recently been on an upward path.

Over the past three months, five-year credit default swap (CDS) spreads have narrowed dramatically, with Gazprom around 31bps tighter to almost 178.5bps, Rosneft Oil (OTC: OJSCY) tighter by about 27.5bps to 226bps and Lukoil (OTC: LUKOY) having narrowed a little more than 33bps to just north of 182bps.

Meanwhile, spreads on Russia’s sovereign five-year CDS have tightened almost 36.5bps over the past three months to a little more than 131bps.

Getting an upgrade

Against this backdrop, Moody’s Investors Service earlier in February upgraded Russia’s sovereign credit rating to an investment-grade ‘Baa3’ from a junk status ‘Ba1’.

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Disclosure: The author does not hold any positions in the financial instruments referenced in the materials provided.

The analysis in this material is provided for information only and is not ...

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