BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Sanctions On Russia Not Going Away Anytime Soon

This article is more than 7 years old.

The Russians will blame Ukraine. The Europeans will blame the Russians. Meanwhile, market consensus seems to have gotten this one right. No, Russian sanctions are not going to get lifted in July as a few contrarians believed in January.

“I told Vladimir Putin when I went to Moscow that we want to lift sanctions, even if progressively,” French Foreign Minister Jean-Marc Ayrault told France 2 television on Friday. “But for that, things have to move, and so far things are not moving.”

What's not moving? The Minsk II Accord is not moving. In fact, given the governability woes in Kiev at the moment, there is no way the Minsk II agreement can be fully implemented without political willpower in the capital. Russia has its part of the deal to adhere to as well. The accord requires Russia to stop supporting anti-government militias in eastern Ukrainian cities like Donetsk and Luhansk. Putin admitted last year to providing more than mere tactical support to rebel groups that have since created their own mini-enclave within Ukraine. They want autonomy. Kiev does not want to give it to them. But putting autonomy up for a vote is a major part of Minsk II and Ukraine's government has proven unable or unwilling to make that happen.

Putting autonomy up to a vote sets the Donbass region, which encompasses both Donetsk and Luhansk cities, to become the next Crimea. Two years ago, that Black Sea peninsula was semi-autonomous and part of Ukraine's economy. Crimea is home to the historically significant city of Yalta, and also home to Russia's only warm water naval port. Today, Crimea is essentially a federal subject of Russia following a secession vote that took place in March 2014. Returning Crimea to Ukraine is not part of the Minsk II agreement. But a cease fire in the Donbass is, and so as long as their is gunfire in eastern Ukraine the European Commission will pressure member states of the E.U. to stick with sanctions.

On Friday, Russia's Tass newswire reported that at least 5,000 protested against elections in the Donbass.

Ukrainian president Petro Poroshenko showed he could be a voice of reason that same day, arguing against any continued armed conflict against the pro-Russia militias in the region. "I'd like to say once again there's an absolutely clear position and it suggests there's no getting Donbass back militarily," Poroshenko reportedly said on Friday during a meeting with Ukraine's National Security and Defense Council. Poroshenko has been only mildly interested in a vote in Donbass. But even if he was adamant about forging ahead, there are enough opposition forces in the Ukranian parliament to roadblock such efforts. That means Ukraine is as much to blame for the failure of Minsk as the Russians, whose involvement primarily exists in the shadows of covert operations, often subject to conspiracy theory and unreliable sources of information.

Meanwhile, market consensus has gotten the Russia story right.

Back in October, investors and business leaders attending an investor forum hosted by CNN's Richard Quest was asked when Europe and the U.S. would lift sanctions on Russia. The vast majority said they would not be lifted in 2016. Others said they would remain permanent. Both the U.S. and European Union have sanctions out on Russian financials and energy companies. Russia retaliated by banning imports of European and American agribusiness products, from dairy to fish.

Contrarian hedge fund manager David Herne of the Specialized Russia Growth Fund in the Caymans said sanctions removal would be a boon for Russia's economy and would blow away the dark clouds hovering over Russia. Herne was featured in the most recent FORBES Investment Guide. "I don't know when Russia's market will get better. I just know that it is going to be worth a lot more than it is today," he said.

Known on Wall Street as the 'Wild East', Russia has been closely tracking the fortunes of oil rather than Western politics. To date, the Market Vectors Russia (RSX) exchange traded fund is up 14.2%, beating both the MSCI Emerging Markets Index and the S&P 500. RSX also beat the market in the first quarter, rising 11.7%. By comparison, Herne's Russian Growth Fund is beating all three -- MSCI EM, the S&P 500 and the popular Russia ETV -- rising 16.8% in the first.

Follow me on LinkedIn