The threat of long-term damage to the Russian economy remains high since the US began both implementing and threatening a number of potentially far-reaching sanctions against Moscow in August, analyst Chris Weafer co-founder of Macro-Advisory consultancy in Moscow wrote in a report on October 2.

Weafer noted that between now and the end of November, the US Congress is expected to introduce new sanctions and US President Donald J. Trump will decide on the second phase of sanctions under the Biological Weapons and Warfare Elimination Act (CBW).

“How damaging these actions and their enforcement will be may depend on whether there are fresh accusations of election meddling against Russia during the US mid-term elections on November 6,” Weafer explained.

“Because of the uncertain threat level, strategic investors are staying on the sidelines and delaying investment decisions. If the next round of sanctions are deemed mild then investment activity will pick up in early 2019. If otherwise, the level of FDI and investment will remain low.” Weafer, a Moscow-based analyst,  wrote in reference to foreign direct investment.

“Russia’s economy is stable and its balance sheet is strong. There is no danger of a financial crisis or a return to a recession even with the tough new sanctions. The real problem is that economic growth will be stuck in the 1.5-2.0% range without a big increase in investment and/or a major improvement in the investment and business backdrop,” Weafer wrote while adding that the damage to the Russian economy is likely to be felt in the long term.

According to Weafer, Moscow appears to be in a holding pattern since the escalation of sanctions in early August.  The relatively low-key response from the Kremlin and the Duma – the Russian Lower House of Parliament – has been a surprise considering the previous condemnations and threats that automatic from the Kremlin following previous of sanctions going all the way back to 2014 when Moscow was first placed under international sanctions for its invasion and later annexation of Ukraine’s Crimean Peninsula.

This time, however, the Kremlin has hardly made any noise, which suggests that Moscow does not wish to further inflame the situation or is waiting to assess the Washington’s next course of actions.

The critical driver for the ruble since 2017, according to Weafer, has been the imposition or threat of  additional US and EU sanctions. The ruble now reacts immediately to fresh updates and then drifts against the backdrop of the oil price and the Central Bank of Russia’s policies, which simply wait for the next round of sanctions.

“The CBR has not used any resources to try and prevent the ruble’s weakness when facing sanctions. The government has made clear that it prefers a “weaker-for-longer” ruble rate to help economic competitiveness,” Weafer wrote, before adding that the Russian government also wants to avoid a scenario where the ruble would be too weak.

The recent drop to RUB 70 per US dollar was too much for the Kremlin to stomach as it occurred too quickly and raised serious concerns about inflation. The CBR was forced to raise the key rate and suspend FX purchases to the end of the year. The CBR’s move, coupled with the decision by the US Treasury Department’s Office of Foreign Assets Control to extend the expiration date for the general operational licenses of Rusal and EN+ – the sanctioned companies owned by Russian oligarch Oleg Deripaska – and conciliatory comments from Trump about the Nord Stream-2 gas pipeline from Russia to Germany, has allowed the ruble to rally to the mid-60s per US dollar.

What happens, in Weafer’s view, next depends on the next wave of US sanctions. Where the ruble rate ends by the close of the year will entirely depend on whether the next round of sanctions is deemed tough or mild will determine whether the ruble/dollar exchange rate rises above 70 or drops to the low 60s.