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Relief rally? Russia markets shrug off sanctions

Russia's MICEX Index rallied 2 percent in morning trade on Wednesday, despite news of the toughest sanctions against the country since the end of the Cold War.

Buying on Russia's blue-chip index accelerated during the morning, with natural gas producer Novatek rising to the top of the bourse, and Sberbank and Rosneft also notching healthy gains. The index is still lower by 7 percent year-to-date, however.

Moscow's smaller RTS Index also rose by 2.5 percent the morning after the sanctions were announced, and the Russian ruble climbed to trade at 35.63 against the dollar, after closing at 35.825 on Tuesday.

Andrey Rudakov | Bloomberg | Getty Images

"Russian markets (are) partaking in something of a relief rally this morning, with the ruble stronger, credit tighter and the Russian stock market higher," Tim Ash, head of emerging markets research at Standard Bank, said in a morning note.

Read MoreUS, Europe are ourfriends, not foes: Russian diplomat

Ash said investors were effectively telling U.S. and EU policymakers to "bring it on" if the current round of sanctions was the worst they could do, from a market perspective.

"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," he added.

Deutsche Bank strategist Jim Reid said the ruble's rally after news of the tougher sanctions was particularly interesting. He suggested in a research note the move higher came amid relief that broader, more disruptive sanctions had been avoided for the time being.

U.S. President Barack Obama detailed new penalties against Moscow on Tuesday, which he said were designed to make Russia's "weak economy even weaker". They come in response to Russia's continued support of separatists in eastern Ukraine, with Russia continuing to build up forces on its border with Ukraine, Obama said.

Read MoreWill stocks continue to ignore geopolitics?

The U.S. restrictions target Russia's energy, arms and finance sectors – all key to the country's economy. It will limit access to U.S. capital markets for banks including VTB, the Bank of Moscow, and the Russian Agriculture Bank (Rosselkhozbank).

VTB was the worst performer on the MICEX at the open on Wednesday, slipping 2 percent, but it quickly pared its losses. Russia's central bank stated on Wednesday morning that it would backstop the nation's banks if needed, according to Reuters.

The EU also unveiled new economic sanctions against Russia on Tuesday, targeting the oil sector, defense equipment and sensitive technologies.

Read MoreNew sanctions for Russia—here's where they'll hurt

Standard Bank's Ash added that investors were are relieved the latest sanctions were not worse, and targeted future long-term financing rather than existing debt and equity holdings. He also noted bright spots in Russian fundamentals and added that extra liquidity from global central banks was forcing a search for yield and thus boosting the assets of all emerging markets.

Peace talks between Ukraine, Russia and European officials due to take place in Belarus will be key in determining the next move for all parties, Ash added, and may provide a "face-saving way out" for Russian President Vladimir Putin.

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