Marcus Booth in London -

Russia has experienced a “significant rally” in recent weeks, amid “wide acknowledgement” that the country has “significant financial cushions and liquidity buffers,” Andreas Kolbe of Barclays told attendees at the "EMTA Special Seminar "Russia/Ukraine: An Update" on March 26.

At the panel session, hosted by the Emerging Markets Trade Association and law firm Skadden, Arps, Slate, Meagher & Flom, a range of experts noted the improving market conditions in Russia, but also highlighted worries over the likelihood of sanctions continuing against Moscow and the risks for the reform effort in Ukraine.

Stanislav Gelfer, of BlueBay Asset Management, summed up Russia’s current macroeconomic problem as one of flows rather than stocks. “The balance sheet of the country was strong a year ago, was strong three months ago and is still strong now, especially given the ability of policymakers to engineer their way into a flexible currency. This has helped [the authorities] to preserve a lot of that currency strength,” he argued.

Gelfer added that: “when we look at Russia right now we are focusing on the balance of payment flows, on the budgetary flows, on GDP and on inflation. These indicators, to us, are the most likely ones to deteriorate or underperform.”

Kaan Nazli, of Neuberger Berman, argued that Russian President Vladimir Putin understands these intricacies and that, “in the long run, Russian thinking is that they can ride it out, while taking steps that don’t jeopardise other geopolitical aims.”

Anna Shamina, of J.P. Morgan’s Emerging Market Fixed Income division, also argued that the current outlook for Russia is improving: “As an oil dependent sovereign with a flexible ruble, Russia, politics aside for a second, actually looks pretty good… the flexible ruble is definitely a big benefit.”

Shamina admitted, though, that any optimism needs to be checked: “I don’t think things can all of a sudden get better. We all know that after a quiet or semi-quiet period, there can be escalations. I think this year [Russia] will be in and out of escalation situations.”

Given the well-documented link between oil and the ruble, escalations are often linked to the volatility of the commodity, although as Nazli pointed out: “In the last few months we can see that oil prices and the Russian ruble have begun to decouple a bit from each other.”

But Shamina speculated that any deviation would only be slight. “Do I believe there is going to be a big diversification away from oil or a quick diversification away from oil? No. But even if there is going to be a small amount, then it is quite good progress.”

Sanctions talk

Western sanctions on Moscow were also prominent throughout the debate. When asked, Gelfer remarked that, “in terms of asset price reaction, the threat from further sanctions may be actually diminishing.” However, he admitted that a threat to the banking sector could be completely different. “The sheer fact, for example, that another big bank can be taken out of the system, would be very negative.”

“This is not necessarily because Russians could not come up with a way to go round [the legislation],” claimed Gelfer. “It is the threat of more sanctions for the rest of the system that is more damaging.”

Jamie Boucher, of Skadden, Arps, Slate, Meagher & Flom, believed that this threat could remain for some time. “I think that, both on the EU side and the US side the officials have laid down the marker that nothing is getting rolled back till all of the commitments are reached. In the US, at least, there is enormous political pressure,” he noted.

“In this day and age, sanctions are the tool of choice to avoid sending troops… I do think that sanctions will be increased, as the other alternatives have such significant consequences,” Boucher added.

Signs of hope for Ukraine

Although a large part of the panel session centred on Russia, there was some discussion on recent events in Ukraine and the positive sentiment generated by the recent second International Monetary Fund (IMF) programme for the Eastern European nation.

Detailing that the second IMF programme is definitely an improvement, Gelfer said that: “The democratic side of government is more impressive than six months ago, they have finally brought in new people, professional people, both in central banking and finance. There is also, very importantly, change in the judicial scene and we are already seeing some results.”

Shamina agreed that the most recent programme was an improvement: “I think that the first IMF programme was probably overly optimistic and the second IMF programme is a bit more realistic, but I still think that it assumes that a lot of things are going to be the right way.”

Even with these improvements, however, Nazli still admits that he, “cannot see Ukraine reforming and becoming part of the EU as part of an acceptable scenario for Russia.”

Shamina was also sceptical about any full integration into Europe: “I think the Ukrainian geographical position will always put it in a very difficult situation." However, looking slightly longer term, Gelfer confessed that he thinks Russia cannot win against the EU and US and, “Ukraine may edge towards the European way.”

It must be stressed though, that Ukraine still has a long way to go before planned reforms materialize into positive change. As Shamina admitted, even when questioned about how much cushion is built into the IMF programme, for when things to go wrong, the only answer the government could provide was that, “failure is not an option.”