It was always expected that April would be an “interesting” month for investors and businesses in Russia. It is the month when it was hoped there would be clarity with regard to the cabinet changes expected after the May 7 inauguration and also with regard to the policy changes likely to be prioritized by the next government. There was also plenty of guidance from the US Treasury Secretary that another round of sanctions was coming in April, if only to satisfy the demands of Congress. In the end, it was not so much an interesting month as one, which has created an even more interesting and dangerous backdrop for May.

The April 6 US sanctions are a game-changer in terms of risk, both actual and perceived, for foreign investors and companies working in and with Russia. The US Treasury Department has expanded the risk paramaters by targeting oligarchs and their business interests while previously it was assumed that sanctions expansion would be confined to political targets and individuals considered close to the president and the Kremlin elite.

The fact that The Treasury Department miscalculated the impact on global metals markets by adding Rusal, and is now looking to walk that back, does not alter the fact that any future sanctions could include oligarchs and businesses, albeit less likely those with a meaningful presence in an important global industry. The oil and gas sector companies or other major metals companies are, for example, most unlikely to find themselves on the Specially Designated Nationals And Blocked Persons List (SDN List).

While one can spend days trying to figure out the who may be next and why scenarios, two big issues are now very clear; one is that the US Congress is not going to ease up the pressure on the Executive Branch to add more sanctions against Russian interests should the excuse or opportunity arise. The second is the perception of Russian investment and business risk, which had started to improve markedly from late 2016, has spiked higher again and will remain elevated for some time. That will restrict both the new Russian government’s options and restrain economic activity, at least this year and next.

Russia’s advantage is that it is in a strong financial position, especially with the price of Brent crude trading above $74 per barrel. At this price, over the full year, the federal budget will generate a surplus of approximately $25 bn or close to 2% of GDP. Because of the so-called budget rule and the tight fiscal discipline that years of sanctions has forced upon the government, the budget will break even this year at $54 per barrel. This is a considerable improvement on the $115 per barrel it needed in 2013 and places Moscow in a much better position than, e.g. Saudi Arabia and most other OPEC nations. It also means that Energy Minister Alexander Novak has a stronger hand to play when it comes to negotiating a new deal with OPEC to replace the current production quota agreement, which ends later this year.

Moscow can provide financial support for companies affected by the sanctions and can again make available access to the Central Bank’s financial reserves to companies facing reluctance by foreign banks to refinance debt. There will be no financial crisis as a result of the sanctions escalation, even if there are more to come this year. President Vladimir Putin has been consistent in his stance that no major Russian company should ever default on external debt.

The real issue is what will be the impact on economic growth over the course of Putin’s next term and whether he will be able to fund the promises made to the electorate while having to maintain an overall conservative fiscal and debt stance because of sanctions impact?

There is enough momentum and domestic resources to keep growth ticking along close to the 1.5% level for several years. But the economy needs 3.5-4.5% annual growth and the only way to achieve this is with higher investment spending. Hence, the reluctance by the Kremlin to support any of the counter-sanctions proposed by the Duma that would make it even more difficult for foreign companies and investors to work in Russia.

It is, in any event, inevitable the recent sanctions escalation will make it a lot more difficult for Russian companies to borrow money on international markets and many foreign companies will prudently delay expansion plans to wait and see what happens next in order to manage risk.

One of the silver linings to current events, at least from the government’s view, is the weaker ruble. Pre-2015 the ruble was rightly considered a petro-currency. Where crude went then not far behind was the ruble-dollar exchange rate. In reality this changed from early 20015 when the Central Bank pulled back from supporting the ruble while the evidence of the benefits from the weaker ruble started to be visible from the autumn of that year. The President, who previously was an advocate of a strong currency, had an epiphany moment and, since then, is a strong supporter of a weak ruble policy. The boost to agriculture output, the rising demand for domestic goods over more expensive imports, the competitive boost to Russian exports generally and the more manageable budget deficit since 2015 can mostly be attributed to the weaker ruble.

To find hard evidence of the end of the ruble as a petro-currency one only has to consider that while the price of oil rose 41% between July 1 last year and March 31 this year, the ruble gained only 2.4% against the dollar and lost 4.9% against the euro. In addition, the Central Bank made no effort to stop the sharp drop in the ruble in reaction to the latest sanctions news. The reality is that the government was not only not unhappy with the move but were probably happy to see the ruble move back into the 60-64 range versus the dollar that senior Administration officials had previously cited as the preferred range over the next twelve to thirty six months.

But that is not to say that the government favours an even weaker ruble. It appears to be well understood that an overly weak ruble, such as in the high 60s versus the dollar, would be damaging for some important sectors of the economy, such as pharmaceuticals, which need to import product or ingredients, and would lead to higher inflation. An overly weak ruble also makes it even more difficult for industry to modernize because of the higher cost of imported equipment. For now the greater priority is to sustain the recovery in export sectors and to maintain a competitive domestic industrial environment. Very likely, in twenty four to thirty six months the policy will have to relax and allow the ruble to appreciate, assuming oil stays high.

The first two weeks of May are traditionally quiet in Russia because of the holiday period. That will start to change very quickly after the May 9^th military parade on Moscow’s Red Square. Cabinet changes will come quickly as will policy statements. Against this backdrop the Duma deputies will start to debate proposed counter-sanctions measures from May 15 and that will generate a lot of political and nationalist noise. The hope is that by the time the government’s annual economic showcase starts in St. Petersburg on May 24, the noise level will have subsided and pragmatism will again prevail.