As the US threatens to escalate sanctions, the question remains how effective sanctions can be, and what would be the scale of them.
I hosted a panel last week in NY with some of the most plugged in lawyers, US market players and deal makers in Russia, and here are some thoughts on the issue.
The first issue that must be addressed is how far is the US willing to go on sanctions. It appears as if the EU cannot be as extreme as the US in their approach here with Russia much more integrated into the EU economy. This has always been the negotiating element that Putin knew he held over the EU. Russian gas and materials are fundamental to the European economy. In terms of sanctions, by definition there are a couple different approaches that can be attacked but the core will be focused on cutting off Russian banks from international markets. This will in turn choke off the private sector and can in fact be something that impacts Russia’s already fragile economic balance.
Meanwhile, as Putin laughs off sanctions (In Russia if you were a Duma member who had a visa revokes in round 1 of sanctions this was seen as the equivalent of a “political Oscar”), Iran is on record as saying they are surprised at how devastating the Iran sanctions were in their implementation. The WSJ has an interesting article this AM citing government technocrats in Tehran saying that Russia should be more concerned than they have been about the potential effectiveness of sanctions against Russia. Clearly many will say this is a politically biased story and one that reads as you would expect from the WSJ. We think the storyline has merit.
In playing Russia stocks we believe there is an extended period of negative headlines that will confine the local MICEX index in a trading range. We do, however, think that the price action of the last month offers some context for trading this market over the next month. The lows of March 14 of 1237 on the index included an intraday move to the key 1200 level, which clearly held. We think this level which was the May 2010 level of support, the key resistance for the market on the way up in June and Sept of 2009, is where Russia is to be bought. This blood in the streets moment (not literally) is a trading opportunity for investors. Look at the moves in Russian stocks since March on an individual level. Moves of 20-40% took place in Russian blue chips from that March 14th date to the trading highs.
The MICEX is currently at 1328 this morning and 1300 is the most recent trading support line to review as tensions ebb and flow on a daily basis. 1200 or a move to 1225 and test of 1200 intraday is your line in the sand the brave take a shot at if we move lower in Russia.