RUB: Sanctions threat returns – Commerzbank

Source Fxstreet

The likelihood of new, harsh sanctions on Russia is rising again: western leaders are abandoning hopes of meaningful diplomacy and reverting back to economic pressure, which had been the consensus strategy until US President Donald Trump took over. After initially trying out his idea of diplomacy, Trump has now labelled his administration’s Kremlin negotiations as 'unproductive' – he now publicly endorses US Senator Lindsey Graham’s Russia sanctions bill which proposes 500% tariff on countries which still import Russian oil and gas, Commerzbank's FX analyst Tatha Ghose notes.

New EU sanctions under way

"At the same time, EU policymakers say that they are preparing the most punitive sanctions package since 2022 – this marks a renewed turn in sentiment, after earlier hesitation to revisit measures such as lowering the price cap on Russian oil (which faced internal vetoes). The (already active) proposal to use frozen Russian assets to fund Ukraine could also return to the agenda in an expanded format."

"Of course, the eventual magnitude of sanctions may not turn out to be what current proposals suggest. For example, after months of painstaking tariff negotiations which teetered on a knife’s edge, it is near-impossible to visualize that the US will simply slap a 500% tariff on China. Similarly, it is also likely that implementation of agreed measures would take time; tariff compliance could, once again, prove complex and partial – indeed, sanctions effectiveness has diminished over time. But all said, it does appear that a sanctions package of significant scale may now be in the works. And, this comes at a time when the Russian economy and financial system are beginning to show signs of stress from existing sanctions and from the ongoing war."

"If a major new source of uncertainty were to arise, one potential impact would be that the central bank (CBR) may have to delay its next rate cut (widely anticipated on 25 July). A domestic gasoline price spike is already putting some question marks on the size of that rate cut. The rouble exchange rate, on the other hand, no longer reacts to fundamental developments. But, that is under routine situations. A full-spectrum Western sanctions package, which will seek to disrupt Russia’s remaining energy trade and seek to cut off external financing mechanisms even within emerging market peer groups, would break through that artificial exchange rate stability."

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