EU foreign ministers have extended sectorial sanctions against Russia until the end of January 2016 in order to make Russia comply with the ceasefire agreement signed in Minsk in February 2015. Sanctions against the Crimea were also extended until June 2016. Russia reacted by extending the ban on food imports from the West until August 2016. The extension of EU sectorial sanctions implies, among other things, that the prohibition to directly or indirectly buying or selling new bonds, equity or similar financial market instruments with a maturity exceeding 30 days, issued by major state-owned banks (Sberbank, VTB Bank, Gazprombank, Vnesheconombank and Rosselkhozbank), major state-owned oil companies (Rosneft, Transneft and Gazprom Neft) and defence companies remains in place. Moreover, arms trade with Russia remains forbidden and restrictions on exports of dual-use products and products and services for oil exploration and production remain in place. According to the Minsk agreement, East Ukraine’s border control must be transferred to Kiev and Kiev must grant more autonomy to the eastern provinces. However, little progress has been observed. On the contrary, according to NATO, Russian tanks and armoured vehicles continue to cross the border while Moscow continues to deny any direct involvement in Eastern Ukraine. In the meantime, renewed fighting between pro-Russian rebels and Ukrainian troops has been seen in the East of Ukraine.

Impact on country risk

The extension of EU sanctions against Russia means that access to international capital markets remains limited for companies targeted by the sanctions as well as other companies. Despite the central bank’s recent decision to decrease its benchmark interest rate to 11.5% (from 12.5% before and 17% at the end of 2014), financial costs remain high and access to domestic credit difficult. Indeed, faced with financial constraints (limited access to international capital markets) and a deteriorating asset quality amid growing non-performing loans in construction, machinery and equipment production for agriculture, and retail sectors, banks are reluctant to lend. What is more, GDP is likely to decline by 3.4% in 2015 according to the IMF amid contractions in domestic demand driven by falling real wages, high financial costs and weak confidence. On the positive side, despite the sharp drop in oil prices which account for a large share of current account receipts, the current account balance is expected to remain in surplus. That being said, the overall balance of payments will remain under pressure amid capital outflows and difficult access to capital markets. As a result, foreign exchange reserves continue to be under pressure but to a lesser extent than in 2014. In this difficult economic context, Credendo Group’s country risk classifications are unlikely to be revised upward.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com