Since the end of 3 November, the Russia equity market has risen by 5% in USD terms. This is 130bp better than for emerging markets overall. During the same two days after the 2016 election, the Russian market rose by 1.5% and broader EM lost 3%. In 2016, the picture was clearer – the markets believed that Donald Trump winning meant the lifting or at least easing of sanctions on Russia. At the time of writing, it appears Trump will lose to the Democrat candidate, Joe Biden, this time. So, given that likelihood, why has the Russian equity market performed well in the last two days? Why the optimism towards Russia?
Graph 1. Russian equity market vs. broader emerging market equities: Reaction to the US elections during two days following the events
Data as at 5th of November 2020, in USD terms
Sources: Bloomberg, TKB Investment Partners, November 2020
Nassim Taleb, in his book “Antifragile: Things that Gain from Disorder”, presents an example of what happened to oil prices when the war against Iraq started in January 1991: They dropped instead of seeing the rise the consensus had predicted. “War could cause a rise in oil prices, but not scheduled war”. It looks like something similar has happened with the impact of the likely Biden’s victory on the Russian market.
Sanctions fears normally evaporate
Joe Biden has consistently voiced his strong opinions about punishing Russia, leading to investor fears of possible new sanctions should he win the White House. The range of political risks and bitter accusations is wide. Earlier this year, Biden called Russia the biggest threat to US national security, proposing limits on imports from Russia to the US and NATO countries. Biden’s supporters claimed tougher restrictive measures were needed, including ones against the Russian banking sector. Since 2018, there have been new sanction packages ready, including the famous DETER and DASKA acts aimed at ‘defending US security and elections’ against outside aggression. Both packages include proposed sanctions against Russian banks and government debt. On top of that, Biden’s supporters have demanded new sanctions in response to the Navalny case.
From mid-August to 3 November, the MSCI Russia 10/40 index has already lost 9% in USD terms in relative performance to EM mainly on the expectations of new sanctions. Will the reality be as harsh as suggested? We highly doubt that. Normally, the negative impact from news flow related to sanctions fears against Russia evaporates within 60 working days.
President Obama and then-Vice President Joe Biden were in power during the 2014-2016 period of sanctions against Russia. Five hundred and fifty-five Russian individuals and organisations were placed under sanction limitations, double the number of Trump’s sanctions targets. None of the sanctions put in place under Obama/Biden or during Trump’s presidency have been significant. One can look at the drops of Iran oil net exports during sanction periods to get an idea of the consequences of significant sanctions. The sanctions against Russia have not limited its ability to export oil, gas or any other important commodities. Why? Any material sanctions are likely to have a dramatic boomerang effect. The Russian economy is deeply integrated into the global one.
Graph 2. Daily crude oil export (in millions of barrels)
Sources: OPEC, CDU TEK, Kommersant.ru, TKB Investment Partners, November 2020
Moreover, trade turnover between Russia and the US has been growing annually since 2017, especially the supply of petroleum products. According to the EIA, as of the first half of 2020, Russia was one of the major suppliers of crude oil and petroleum products to the US. More than 70% of imported semi-finished products in the US are purchased from Russia. According to Vygon Consulting’s report, US refineries are experiencing a shortage of raw materials due to the ban on imports of Venezuelan heavy oil. Many refineries in the US cannot run on light oil from Texas or shale oil fields, so light oils are mixed with heavy ones.
The boomerang effect risk has already been preventing material sanctions against Russia for seven years.
Graph 3. Annual US crude oil imports from Russia (in millions of barrels)
Sources: EIA, TKB Investment Partners, November 2020
Neutral for oil price
Negative. Biden’s policies might lead to an easing towards Iran in exchange for a new nuclear deal. If this happens, Iran’s oil exports could rise by about 1 million barrels a day by the end of 2021, which, in turn, will most likely destabilise oil prices. According to TankerTrackers, Iran exports rose sharply in September despite US sanctions. This might have been due to countries ordering from Iran in the belief that Biden would become president.
Positive. Biden has promised to stop issuing new drilling permits on federal lands, which includes the large Permian shale basin in New Mexico. This would potentially reduce US oil production by 2 million barrels per day by 2025, according to S&P Analytics.
Positive. Biden’s foreign policy is likely to be less aggressive and more predictable than his predecessor’s. This would benefit emerging markets, including Russia. For example, Biden has less antagonistic views on China; he arguably see it more as an opportunity than a threat. Any easing of tensions between the US and China would bring benefits for global trade and Russia in particular.
Potential sources of positive news in other areas
There have been ongoing talks during Trump’s presidency that have pressured him to impose sanctions against the Russian pipeline, Nord Stream 2. Biden will likely try to improve the relationship between the US and the EU. This means that there will likely be no sanctions against the pipeline as many European companies involved in the development would suffer if there were. Germany’s government has voiced its strong opinion regarding the potential losses by EU countries should such sanctions be put in place.
Moreover, the political structure of the US is highly polarised, so there is a tendency for the incoming party to cancel the prior president’s innovations. This happened when Trump took over from Obama and overturned several of his policies. Should Biden win, as looks very likely, and should he start to roll policies back to the way they were pre-Trump, it might be positive for Russia. For example, a rollback on the 10% increase in tariffs on aluminium and 25% increase in tariffs on steel introduced by Trump would clearly be beneficial for Russian companies.
Authors: Vladimir Tsuprov, CIO; Egor Kiselev, Head of International Business & Investment Marketing; Aleksandra Kuznetsova, Junior Investment Specialist
 Cumulative contribution of Russia specific factors to the Russia vs EM excess return. More details about the methodology can be found here
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