The capital markets are becoming an increasingly uncomfortable and costly place for the Russians to do business. Even before an S&P rating cut last week that left government debt at the edge of investment grade, the finance ministry was cancelling bond auctions – seven in the past two months – because it refused to meet investor demands for hefty, junk-like premiums to hold the paper.
The picture is just as clouded in the corporate realm, even for relatively strong credits such as energy giant OAO Gazprom, whose debt has fallen 4 per cent so far this year. The average yield on dollar-denominated Russian corporates has shot up to 7.2 per cent, a rise of 1.4 percentage points in less than five months.
Meanwhile, the Russian economy continues to teeter on the brink of recession, and the West has slightly widened various financial sanctions and travel bans to put more pressure on the wealthy pals of Russian President Vladimir Putin.
That's the good news for those who are convinced Mr. Putin eventually will have to put Russia's economic and financial interests ahead of his ambitions in eastern Ukraine – particularly if his strongest business allies begin to feel the heat.
The bad news is that the Kremlin doesn't need to tap the international markets for capital, particularly if oil prices remain high. And it can safely ignore the sanctions imposed so far. Western leaders are still aiming little more than a pop gun at Russia, when what they need is a supergun capable of actually hurting the economy and blowing a few holes in the pocketbooks of the oligarchs.
No wonder equity investors shrugged off the sanctions as inconsequential, driving up the Russian benchmark index Monday by 1.5 per cent and nearly another 1 per cent Tuesday. The ruble also rose slightly against a basket of Western currencies.
As if to underscore the point that the latest sanctions carry little bite, oil heavyweight OAO Rosneft unveiled a record dividend payment, sending its shares to a six-week high. Bargain hunters are also snapping up the battered bonds of certain Russian corporations, including Gazprom, as part of a broader global search for yield.
Rosneft chief Igor Sechin, whose name graces the revised sanctions list, pointedly told "shareholders and partners, including those in America," that the curbs would not affect its various foreign dealings.
Still, Gazprom, whose profit climbed 10 per cent last year on stronger demand from its European Union customers, warned in its annual report: "There can be no assurance that the existing or new sanctions will not be expanded to include any company of Gazprom group."
That will take a considerably tougher stand, particularly from EU politicians who face enormous pressure from major financial institutions, energy distributors, manufacturers and service companies worried about the fate of their large Russian investments and trade ties if Moscow decides to retaliate.
Mr. Putin shows no signs of willingness to negotiate a diplomatic solution to the Ukraine crisis unless it meets all of his demands. And he has a full treasury and fat oil and gas revenues – in excess of $320-billion (U.S.) annually – to argue his case that Russia can shrug off any negative sentiment in the capital markets.
To have any sort of impact, the West must set up effective roadblocks that impinge on Russia's vital connections to global financial, trade and investment flows. But heavy sanctions come with a cost neither Washington nor Brussels has shown a willingness to pay … at least not yet.