Russia: U.S. sanctions pummel ruble
The imposition of new sanctions by the U.S. caused the ruble to dive in April and triggered a sharp sell-off of Russian financial assets. While the sell-off abated shortly after, the ruble has remained under pressure amid a general sell-off of emerging market assets. On 3 May, it ended the day at 63.0 per USD, a 9.2% depreciation since 5 April, the day before the sanctions were announced. The sanctions target several high-profile Russian businessmen and their affiliated companies, freezing their U.S. assets and banning Americans from conducting business with them. Moreover, U.S. investors were given a deadline to divest debt and equity holdings of the sanctioned companies. The sanctions notably targeted several global enterprises and have increased uncertainty over what future penalty measures could look like. They also coincide with a broader escalation of tensions between Russia and the United States, particularly over the conflict in Syria.
On top of a weaker ruble, the sanctions are casting a cloud on Russia’s broader economic prospects. Upside risks to inflation due to the currency’s depreciation prompted the Central Bank to pause its easing cycle in April, and a slower and more modest easing cycle could provide fewer tailwinds to growth. In addition, the depreciated currency and higher inflation could weigh on household spending, while the uncertain geopolitical environment could hurt investment. That said, the Central Bank has sufficient reserves that could act as a buffer if the ruble falls further, while outside of the sanctions economic data has been encouraging. Higher oil prices and low unemployment should provide a cushion for economic activity in the coming months.