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Russia well-positioned against non-energy sanctions in the short term

Border tensions are high, information on the conflict zone is incomplete and misleading, and soft-tone diplomacy is not doing the trick. As conflict resolution remains out of sight, international sanctions against Russia are increasingly likely to continue for longer, translating into higher volatility for Russian assets.

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The objective of this analysis is to quantify the risk of a potential debt or currency crisis, and outline the impact on the Russian and Eurozone economies. Our main conclusions are :

with large foreign reserves and low public debt, Russia is unlikely to plunge into a currency or sovereign crisis.
despite significant foreign borrowing, Russian banks are moderately leveraged, well capitalised and have low NPLs. As a result, they should be able to resist financial sanctions relatively well.
geopolitical risk and capital outflows will remain the key drivers of Russian rubble in the months to come. Our short-term fundamental model indicates that it should not depreciate further, however in the long run the Russian rubble could remain under pressure due to high inflation, low growth rates and reform slack.
although counter-sanctions imposed by Russia in the current form should not heavily affect Eurozone economies, former Eastern Bloc countries are likely to suffer most during this impasse.
western countries will be reluctant to sanction Russian oil and gas exports, which should guarantee stable capital flows into Russia’s budget and economy in the medium term.

Helena Clijsters , Geneviève Hamende , Isabelle Rome , Tomasz Orpiszewski , September 2014

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