Renewed US-Russian tension dash business hopes

As Moscow woke up to news of Donald Trump’s US election victory last November, Russian officials could barely conceal their glee that his presidency would end the country’s isolation from international markets.

“Sanctions will be gone by the end of the year. I guarantee it,” one said after a few glasses of wine at a Christmas party near the Kremlin.

Yet after Rex Tillerson’s first visit to Moscow as US secretary of state — where he decried the “low level of trust” between the countries — that optimism has given way to a sinking suspicion that Mr Trump’s Russia policy may be no friendlier than his predecessor’s. Nevertheless, executives and financiers add that Russia’s economy is already doing better without the help of the new president.

“Look how many fronts he’s fighting on right now,” said Yuri Soloviev, deputy chief executive of VTB, Russia’s second largest state bank, which is subject to US and European sanctions. “He’s got such a huge number of things he wants to do that Russia has clearly stopped being one of the things he could solve easily.”

When Mr Trump took office in January, many US business executives believed he would begin to roll back US sanctions passed because of the Ukraine conflict in 2014 — particularly broader measures against the financial sector and Arctic oil exploration.

Now, that optimism is “on life support”, said a senior banker with experience in Moscow who has discussed the matter with the Trump administration.

“None of us could have expected the foaming at the mouth or hysteria around all things Russia,” he said. He was referring to the revelations and allegations about Trump officials’ contacts with Russians, which led to the departure of Michael Flynn, Mr Trump’s first national security adviser, and which continue to occupy Washington.

“We joke that we know how to get people removed from the administration,” Mr Soloviev said. “You just have to ask the Russian ambassador to call them and say, ‘Sorry, wrong number’. They’ll intercept the call. Then you leak it to the press, and they’ll get kicked out of the administration.”

The shift in mood is so great that investors in Moscow and the US alike say the biggest threat to Russia’s market is a fresh round of sanctions.

G7 foreign ministers this week rejected UK proposals for sanctions on Russia in the wake of Syria’s recent use of chemical weapons. But Mr Trump’s mercurial attitude towards Damascus, Russia’s key Middle Eastern ally, and the political fallout over Congress’s investigation into his campaign’s ties to Russia has left investors struggling to guess his next move.

“I think [Trump] has shown his ability to drop friends or potential friends in a hurry when it hurts him,” said Steven Dashevsky, founder of Dashevsky & Partners, a Russia-focused fund and Trump supporter. But he characterised the change in atmosphere as more of an “emotional disappointment” as opposed to a “big business loss”.

Mr Soloviev, who is also an earnest admirer of Mr Trump, adds that VTB, which is barred from raising western debt of more than 30 days’ maturity under the sanctions, has largely shrugged off the punitive measures.

“We’ve got more liquidity than we can handle,” he said. “Most investors are back with us now.”

In the recession that followed the sanctions many foreign banks scaled down their Russian operations — and then missed out on the market’s boom last year, Mr Soloviev added.

“At some point our market share in all investment banking services was between 50 and 70 per cent, which is totally abnormal — and which we were thrilled about,” he said.

The sanctions may already have lost the chilling effect that made Russia a no-go zone for western capital. Investors have begun to return to the market after a stock market surge last year and accompanying boom in Russian corporate eurobonds, which post some of the highest returns in all emerging markets.

Russian government rouble bonds, known as OFZs, have also attracted non-residents, who now make up between 30 and 40 per cent of the market — a higher percentage than before the sanctions.

Ivan Tchakarov, chief Russia economist at Citibank, said it is now “an accepted wisdom” that Russia has done very well. “They have macro stability, and a fragile recovery — but a recovery,” he added. “Given the low yields globally, Russia still presents an attractive proposition.”