It has been just over a year since the implementation of the first round of sanctions against Russia following tensions in the Crimea region. Coinciding with the implementation of the sanctions, oil prices started a steep decline. We take the opportunity to review any tangible impact on the Russian equity market of the adverse scenario over the last year.
First sanctions by US and EU against a range of individuals were implemented in March 2014, however, serious economic sanction began to be applied in July 2014. Current sanctions have a direct impact on energy orientated companies and major banks with strong links to the state. Yet there is indirect impairment as well, as financing operations are constrained, and this affects virtually all of the Russian companies. Sanctions create additional risks for global financial institutions trying to work with Russia, and in most cases these organisations try to limit their exposure to a minimum.
Sectorial and personal sanctions against Russia are only part of the story, Russia is effectively a petro economy with over 50% of government spending dependant on revenue from energy exports. Over the analysed twelve month period one can see a very volatile energy market with at least 45% oil price decline, resulting in an 80% Ruble devaluation. The decline in oil prices began around 2Q14, it accelerated in October 2014.
As seen from the price performance graph, investor reactions seemed to be more amplified after the oil price crash around October/November 2014, than during sanction deployment process starting in March 2014. Russian blue chips Gazprom, Lukoil and Sberbank are all directly affected by the implemented sanctions, however mostly by those implemented around August – September 2014. One has to note that further sanctions against Russian companies were declared after 3Q14, however, these differed little in terms of affect from the ones already implemented by 2Q-3Q 2014.