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Should Euro investors worry about Russian sanctions?

The growing escalation in economic sanctions between the US, Europe and Russia is unlikely to derail European financial recovery despite its worrying short-term impacts, according to BNY Mellon fund managers Standish and Meriten Investment Management.

In July, ongoing alleged Russian involvement in the Ukraine prompted the US and Europe to step up economic sanctions imposed earlier this year, with a range of new measures targeting the banking and oil sectors, defence equipment and sensitive technologies(1). In turn, Russia this month retaliated with a total ban on food imports from the US, the European Union, Norway, Canada and Australia.

Negative figures from statistics agency Eurostat suggest Eurozone growth stalled in Q2(2), prompting some commentators to suggest anticipated fall-out from the latest sanctions could derail wider European economic recovery(3). But US investment manager Standish and Dusseldorf-based Meriten Investment Management take a more optimistic view, anticipating sanctions will most likely have only limited impact.

According to Standish, Russia only accounts for 3% of world GDP growth, restricting the potential effects of its sanctions on global growth. While it acknowledges sanctions on Russia could hurt Eastern European countries such as the Baltic States Standish believes wider impacts should be limited, providing there is no major escalation in tensions between the West and Russia or any major new sanctions imposed on its energy sector.

Commenting, Thomas Higgins, chief economist and global macro strategist for Standish, says: “US and European sanctions are still targeted at individuals and specific corporates, so their impact on the global economy should be limited. Overall, our forecast for GDP growth remains largely unchanged at 3.3% in 2014 and 3.6% in 2015.”

At Meriten Investment Management, head of asset allocation, Gunther Westen, believes Western Europe is feeling the impacts of sanctions and ongoing unrest in the Ukraine, which also pose recessionary threats to Russia. But he is also optimistic impacts will remain limited and Europe can remain on track for economic recovery.

Commenting he says: “Western Europe is certainly the most affected region by political unrest in the Ukraine and subsequent sanctions. Moreover, Russia is most likely to move into a recession, thus creating more headwinds for an already lacklustre upswing in the Eurozone. However, barring a sharp acceleration of events in the Ukraine, or Russia cutting energy supplies to Europe in a response to sanctions, the knock-on effects appear to be limited for the time being.”

“Accordingly, spreads for high beta countries have not moved much in reaction to recent political event risks. This probably indicates that the healing process in the Eurozone has already entered an advanced stage and is not easily derailed. Thus, it would likely take a serious rollover in economic sentiment to see a reversal of that development. Currently we see a low probability attached to such a scenario,” he concludes.

(1)Ukraine conflict: US and EU widen sanctions on Russia. BBC. July 30, 2014.

(2)Euro zone economy grinds to halt even before Russia sanctions bite. Reuters. August 14, 2014.

(3)Upbeat earnings fail to dent sanctions pessimism. WSJ. July 28. 2014.

IMPORTANT INFORMATION

The value of investments can fall as well as rise, so your client may get back less than they originally invested. For professional clients only.

For further information visit the BNY Mellon Investment Management website. Issued as at 19/08/2014. CP13419-19-11-2014(3M)

This article was provided by BNY Mellon and does not necessarily reflect the views of Citywire

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