Russian Market: Don't Buy The Sanctions Story

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Summary

U.S. allows companies to license their production with FSB - the Russian Federal Security Service.

Market robots buy the headlines, falsely believing that sanctions on Russia were lifted.

There is much fuss over nothing. I explain why.

Russian Market (NYSEARCA:RSX) saw great enthusiasm today on news that U.S. lifted some sanctions on Russia. Here's a typical headline: "Russian stocks, currency soar on reports U.S. will lift some sanctions".

The combination of words "Russia", "sanctions", "lift" made algorithms mad for some time. However, the move was quickly over once humans, not robots, had a chance to look at the news and figured out it was in reality.

Here's what happened. At the end of 2016, then-president Obama put some additional sanctions on Russia due to accusations that Russia influenced U.S. elections.

Among these sanctions, there were sanctions on FSB - the Russian Federal Security Service - which, among other things, gives licenses for encryption IT products.

Encryption does not have to be complicated and James Bond - like: your router at home uses encryption. Basically, sanctions on FSB meant that no new electronics from U.S. could be brought in Russia as they just won't get the license.

It looks like this technical nuance was missed by everyone except industry insiders at that time, and now the new administration had to undo the move that had the potential to block the whole Russian market for U.S. electronics. The U.S. itself was quick to dismiss that this move had anything to do with the general stance on Russian sanctions.

Perhaps, Russian market might enjoy a few days of bullish headlines telling that Trump's main goal is to lift all sanctions on Russia as media works for clicks and eyeballs. Your author believes that this is far from truth and we just saw a technicality that attracted media attention and influenced asset prices in the short-term.

I fully expect that the dust will settle soon and the Russian market will look at whether Brent oil (NYSEARCA:BNO) can break through the wall around $57.50. Today brought another attempt of a breakout which failed. From the sanctions side, it is clear that the new U.S. administration is (at least at the beginning) more constructive on Russia, but don't expect that things can move soon.

Given the history and the damage already done, the new administration will need to come up with much political capital to lift sanctions entirely even if it has such intention. Whether it's a good pragmatic use of political capital given the fact that Russia has never been a big trading partner to U.S. remains a big question.

For the Russian market, the Central Bank key rate decision on February 3 will be a main driver in the coming days. The Central Bank is widely expected to leave the rate at 10%.

The rate is clearly bad for the Russian economy but it supports the ruble and pushes inflation down as companies and consumers cannot borrow and spend at a prohibitive rate.

At the same time, the high real rate in a yield-starved world attracts capital to Russia. It remains a question whether the Central Bank will signal that it is ready to decrease the rate in March. If this happens, Russian stocks and the Russian ruble will decline.

Longer-term, Russia needs higher oil prices to deal with the budget deficit and revive the economy. I continue to believe that recent highs mark the local top for the Russian market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.