Best to assume Russia sanctions last forever

Best to assume Russia sanctions last forever

Back in October 2015, a group of roughly 500 investors and executives were asked by CNN host Richard Quest for their opinion on a timetable on Russian sanctions removal. They were attending his televised panel discussion at VTB Capital's annual Russia Calling! investor conference. The options, if I remember right, were six months, a year, two years, permanent. The vast majority chose permanent.

As Forbes writes in an article "Best To Assume Russia Sanctions Last Forever", the market got this one totally right. Sanctions are going on their third year now. It also shows the market is not worried about sanctions. As one fund manager from a major American investment bank with money in Russia told me this week, "We don't worry about the politics. Forget sanctions. We are looking at other things." President Donald Trump is being pressured by a small, but strong Democratic party, establishment Republicans, and uber-hawks in the defense and intelligence community in Washington to ditch this talk of detente with Moscow. Obama tried it. And failed. Trump is trying it, and the whole city is bearing down on him for even talking to a Russian, or trying to do business with one. Trump is under pressure to keep his distance from Vladimir Putin. Any move to cut sanctions, which expire in December, will be deemed as evidence that Trump was in collision with the Kremlin. The Daily Beast, MSNBC, CNN, NYT and The Washington Post will be looking for evidence of money transferred into the accounts of Trump or his associates in some Caribbean bank account. An unnamed official (the same handful that pepper the press on a daily basis with new Russian headlines) will have "evidence".

The head of the National Economic Council of the White House, Geri Kon, said "We will not remove the sanctions against Russia. We may consider tightening them," Kommersant business daily reported on Friday, sourcing Agence France Presse. During his meetings with Italian leaders Sergio Mattarella and Paolo Gentiloni, Trump reaffirmed Washington's status quo stance on holding Russia accountable for its actions in Crimea and eastern Ukraine. The U.S. State Department, led by a "friend of Putin" we were warned about back in December, said sanctions will remain in place until Russia abides by the Minsk accord. This accord, based on the cease fire between Ukraine's military and pro-Russia rebels fighting in eastern Ukraine regions like Donetsk and Luhansk, is dependent on Russia's backing down from military support and Ukraine's promotion of elections. Elections are likely to lead to regional, pro-Russia autonomous government, something Kiev does not want. Its southeastern peninsula of Crimea was an autonomously governed region that voted to secede in March 2014. The U.S., Europe, and the United Nations' official position is that the vote was a fraud. Polls taken at the time by Western firms Gallup, Pew and GfK out of Germany suggested that the  majority of people in Crimea voted to secede and join Russia. Russia argues that is why it took the place over. The West argues Russia annexed it illegally. Crimea's return to Ukraine is not part of the Minsk agreement, regardless of that unwinnable debate.

This week in New York, I was talking Russia and Europe with an investor source from London. I showed him rooftop bars looking at the Freedom Tower in Chelsea. He gave me the lowdown on his thoughts of sanctions removal. Because we were talking off the record and informally, his name will not be revealed here. He said he is watching for signs of detente coming from Emmanuel Macron, and thinks Trump and Putin will get along when they eventually meet. Many in France are souring on sanctions. In April, France's lower house of parliament considered a resolution against sanctions renewal. European sanctions expire this summer. Some 577 deputies supported the resolution, with around 50 in favor of renewing them. It is not binding, but it tells us where the wind is blowing.

Why Macron and France?

Aside from Turkey, Russia has two allies in the middle east. But only one matters materially to France. And that's Iran. French oil giant Total SA has been investing there since Obama removed sanctions. Macron does not want problems with Iran and will side with Russia. If Macron can get Russia to talk to Bashar Assad of Syria, there is a chance that Assad can be asked to step down and we get a peaceful regime change, blessed, if not whole-heartedly, by Washington and the Kremlin. Suddenly, Russia is no longer the bad guy. Sanctions are removed as everyone realizes that even if Russia didn't send a single bullet or loaf of bread to Donetsk, the Minsk accord is DOA without Kiev agreeing to elections. Investors may want to watch for secret handshakes (just kidding) between Putin and Trump during the G-20 meeting this June. It will be the first time the two meet, and that could give us the official, presidential word on sanctions. Assuming they stay forever, Wall Street is not worried. American investors and investment banks are doing business with the Russians. Including those cited in headlines about ex-Trump campaign advisor Paul Manafort. FORBES billionaire Oleg Deripaska supposedly hired Citibank to lead his En+ Group in an initial public offering on the London Stock Exchange. Russia has been a good performer for American portfolio managers, beating the market handedly in 2016. "Even when you discount things like political risk, Russia is a good market," says James Donald, manager of the Lazard Emerging Markets Equity (LZEMX) mutual fund and head of emerging markets at Lazard Asset Management in New York. "I think it can do reasonably well again this year."


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