Russia’s Path to Credit Strength Amid Biting Sanctions (PGIM Fixed Income)

Almost five years ago, the United States and the European Union imposed biting sanctions on Russia following its annexation of Crimea, and more sanctions have been added in the subsequent years. However, in the face of the sanctions, the Russian economy appears relatively resilient, and the government has yet to experience an obvious popular backlash. While Russia’s economic growth will likely remain subdued amid its worrying demographics, lacking structural reforms, and reliance on commodities (primarily oil) in the real economy, we think the authorities will stay on the prudent path that they have forged in recent years. This situation is not expected to change unless additionally severe sanctions (such as the ban on purchasing new Eurobonds or a complete ban on trade) are imposed.

Those prospects remain uncertain as the U.S. Congress has introduced important legislation, but it is unclear whether it will be approved. Meanwhile, the newly formed European parliament may be less inclined to escalate sanctions against Russia. If additional sanctions eventually emerge, Russia’s potential response would only add to the uncertainty.

Given the state of the Russian economy and the uncertainties that lie ahead, this paper analyzes how Russia has coped with the sanctions thus far, what might lie ahead in the coming months and years, and how this might affect its strong credit profile going forward. READ MORE

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