US sanctions are finally proving a ‘major game changer’ for Russia

• Monday saw Russia's main share index, the dollar-denominated RTS, crash 11.4 percent while the ruble fell 4.5 percent against the dollar on Tuesday.
• Washington's secondary sanctions are a particularly powerful tool, and could significantly threaten foreign investment into Russia.

Unloading a raft of targeted sanctions after months of perceived inaction against Russia by the Trump administration, it's becoming clear that Washington has hit the country where it hurts. The intended message is that no oligarch can escape economic punishment for involvement in the country's alleged transgressions.

Russian stocks suffered their worst day since 2014 as fears over recently-imposed U.S. Treasury sanctions swept the country. Monday saw Russia's main share index, the dollar-denominated RTS, crash 11.4 percent while the ruble fell 4.5 percent against the dollar on Tuesday.

Until recently considered a safe bet with many investors "overweight" on Russian assets, the country's markets now appear at the mercy of the U.S. Treasury, whose deployment of punitive economic measures Friday was its most severe — and most unpredictable — yet.

The gut-punch? Washington's secondary sanctions, which threaten to punish non-American individuals and companies doing business with the sanctioned entities in the same way they would Americans. This is a particularly powerful component of the sanctions placed on seven Russian oligarchs, 12 businesses and 17 government officials which were put on the Treasury's Specially Designated Nationals (SDN) list, freezing their U.S. assets and forbidding U.S. persons and companies from doing business with them.

Congress's sanctions legislation, CAATSA (the Countering American Adversaries through Sanctions Act) allows for the measures to be expanded as well, according to Max Hess, political risk analyst at AKE Group. Depending on the U.S. government's determination, he said, "They would apply in full to pretty much anyone — well, anyone hoping to ever use the U.S. financial system — as they would to a U.S. person or company, hence a big deal."

Several Russian entities and businessmen long serving as conduits for Western investment into the country now face crippling restrictions on their reach in international markets. And the sharp drop in domestic asset prices reflect growing fears that anyone could be next.

Immediate repercussions

In an immediate manifestation of the sanctions' impact, Glencore CEO Ivan Glasenberg resigned as a board director of Rusal, the now-sanctioned Russian aluminum firm belonging to oligarch and Putin ally Oleg Deripaska.

Switzerland-based Glencore, the world's largest commodities company, owns a 8.75 percent stake in Rusal, whose shares tanked 50 percent following the Treasury's announcement. Glasenberg's move demonstrated that even non-American entities may now be viewing Russian assets as too risky to hold, proving the effectiveness of Washington's unusually direct shot at the country.

Glencore's statement Tuesday stressed its commitment to "complying with all applicable sanctions ... In order to mitigate any risks to Glencore's business" as a result of Rusal's SDN designation. The consequences of this for foreign investment in Russia were not lost on domestic markets.

The "pot shot" nature of the sanctions, as described by Christopher Granville, managing director at TS Lombard, has investors on edge. One Western analyst observed that "if Rusal can be sanctioned, then any other Russian entity or oligarch can be included in future sanctions hits."

The latest measures came as a surprise to many, after some eight months of delayed action by President Donald Trump on punitive economic measures overwhelmingly passed by Congress in August 2017. And according to senior portfolio strategist Tim Ash at Bluebay Asset Management, they represent "a major game changer in terms of how one should view Russian credit and market risks."

This is, experts say, the first time under the Trump administration that the Treasury has really shown its teeth on Russia — raising questions of how Russia will respond, and what will come next.

The Kremlin has so far responded in a statement acknowledging "strong negative trends" in the market and attributing them to "emotional fallout" from the sanctions, while adding that there will "subsequently be a correction."

The sanctions were announced Friday on the basis of what the Treasury called Russia's "malign" activities around the world, including military involvement in Ukraine and Syria, and alleged cyber crimes and election interference. The Kremlin has consistently denied all claims against it.

Unpredictability appears to be a key weapon for Washington now. Until this point, sanctions risk could be generally predicted based on a specific action carried about by Russia.

"This assumption no longer holds," said Granville. "The U.S. government has demonstrated that it will take pot shots at Russian companies at any time and for no specific reason — i.e. on the basis of general rather than specific complaints against Russia."