Putin Suffers a One-Two Punch on Sanctions and Bonds
Policy + Politics

Putin Suffers a One-Two Punch on Sanctions and Bonds

Russian state-run media last week saw a glimmer of hope that, within Europe at least, resolve to continue with the sanctions imposed on Moscow following its invasion of Ukraine might be fading.

The Kremlin-friendly TASS news agency cited an unidentified “diplomatic source,” who claimed that Austria, Hungary, Italy, Cyprus, Slovakia, France and the Czech Republic all support that lifting the sanctions.

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Such a shift would play to the advantage of Russian President Vladimir Putin, who has tied Russia’s national pride – and his own popularity – tightly to the invasion of Crimea and its continuing influence over Ukraine

Hopes were further raised after The Wall Street Journal reported on a document composed by the EU’s foreign relations section. The paper suggested multiple ways in which Europe could begin improving ties with Moscow, and various scenarios under which the sanctions could begin to be lifted.

The paper appeared to suggest that there is room for easing of sanctions even if Russia doesn’t fully disengage from Ukraine.

The media – particularly Russian media – reported the document indicated a softening of the EU’s stance on sanctions. The possibility that Europe might tire of the Russian sanctions regime before the United States does is not implausible. The U.S. has virtually no significant trading relationship with Russia, meaning that for Americans, the sanctions are practically cost-free. The same is not true in Europe, where many countries conduct substantial amounts of trade with Russia.

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A day after the news broke, however, the EU’s top foreign policy official, Federica Mogherini, moved to dash hope that the current sanctions regime is going anywhere in the near term.

Mogherini, a former Italian Minister for Foreign Affairs and International Cooperation, said in a meeting in Strasbourg that the EU would never recognize Russia’s annexation of Crimea, and that Europe has every intention of continuing with the sanctions regime and even tightening it if Russia continues to act aggressively toward its neighbors.

In case there was any doubt, after a meeting in the White House on Friday, President Barack Obama and British Prime Minister David Cameron appeared in a joint press conference in which Obama stated the two countries’ continued commitment to sanctions against Russia.

“We agree on the need to maintain strong sanctions against Russia until it ends its aggression in Ukraine and on the need to support Ukraine as it implements important economic and democratic reforms,” Obama said.

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Capping a bad week for the Kremlin, on Friday Moody’s Investors Service, citing in part the likely continuation of the sanctions regime, became the second ratings agency in a week to downgrade Russia’s government bond rating to just one step above “junk.” Plummeting oil prices and a plunge in the value of the ruble have battered the Russian economy in recent months, leading to predictions of a recession coupled with double digit inflation.

The Moody’s downgrade came with the warning that Russia is on review for “further downgrade.”

According to Moody’s, “the severe — and likely to be sustained — oil price shock, alongside Russian borrowers’ highly restricted international market access due to ongoing sanctions, is undermining economic fundamentals and increasing financial stresses on both the public and private sectors.”

If there was any good news for Russia’s economy in recent days, it was of a very limited variety. Last week, senior Kremlin officials had warned that the public needed to be prepared for the country’s credit rating to actually fall into “junk” status.

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The likeliest time for that to happen was the anticipated announcement, in the middle of the month, of the new Standard & Poor’s assessment of Russia’s sovereign credit. However, on Friday, S&P announced that it would delay issuing its next rating on Russia until the end of the month.

The decision has the flavor of a stay of execution at best, but these days, Vladimir Putin and his colleagues in the Kremlin will likely take any break they can get.

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