Markets may be overplaying Russia’s resilience

The muted reaction in Russian markets to the growing likelihood of additional economic and financialsanctions by the EU probably reflects two things. The first is the widespread assumption that Europe willmove slowly and ultimately undertake only modest measures against Russia. The second is a belief thatRussia’s strong balance sheet should insulate its economy from the worst effects of any sanctions. On thefirst point we tend to agree. But on the second we think that Russia’s economy is more vulnerable thanmany still seem to assume.