Geopolitical risk premium for Russia is soaring, with no end in sight.
Despite the appearance of stalemate fraught with uncertainty, careful analysis of the causes of the latest sanctions escalation suggests a more positive conclusion that sanctions risk will now subside. Other things being equal, the US government will likely hold its fire on Russia for now. The Russian policies regarded by the US as 'malign' stem from what Russia perceives as vital interests. Those policies would only be changed or abandoned if the US retaliation against that 'malignancy' completely undermined Russia's economy and present political leadership. For the US, however, pursuing the goal of regime change in Russia comes at a price in terms of collateral economic damage that it does not seem ready to pay. Peak sanctions may be behind us.
This more constructive turn of events is now more likely than the opposite scenario of yet more sanctions escalation. Since the threat of further indiscriminate US sanctions will continue to hang over Russia, the political risk premium will remain elevated. If, however, our prediction proves correct, that premium will look increasingly attractive.
Russia's stock market rose from 2,324 at time of publication to an all-time peak of 2,493 on 3 October 2018. Russian assets and currency out-performed other EMs during risk-off episodes.