The Kremlin is working on schemes to offer some protection to oligarchs hit by their inclusion on a new sanctions list released by the US Treasury Department last week, and could create a financial bolthole other oligarchs could use if more names are added to the Specially Designated Nationals And Blocked Persons List (SDN List).

One of the options on the table is to set up two "onshore offshores" in Kaliningrad and Vladivostok, which would be granted special tax status. Sources say that a draft bill has been circulated by the economy ministry and is now being discussed at the ministerial level, reports Bear Markets Brief.

In effect the zones would allow business owners to transfer the ownership of their companies back to Russia, but those companies would still be considered to be domiciled “abroad” and so bypass the Byzantine Russian bureaucracy involved in bringing companies onshore.

A federal official cited in Vedomosti says these measures have been under discussion for some time, but the new sanctions put capital repatriation front and centre. Russian President Vladimir Putin has been on a campaign to “de-offshorise” Russian business, but oligarchs have been very reluctant to bring their holdings (or money) back to Russia.

But they may now. The combined wealth of the richest 27 Russians fell by $16bn in a day on April 9, according to Bloomberg calculations. The irony of the US sanctions is that it is actually helping Putin achieve one of his top priorities.

Putin’s mouthpiece Russian prime minister Dmitry Medvedev promised that the government would help targeted businessmen by making it possible to “return money to Russia quickly and without being taxed.” The offshore zones are rapidly replacing the other leading scheme, which was to issue special bonds that oligarchs could buy that would in effect bring their cash home with minimum tax costs.

“The measure would, in theory, make Kaliningrad and Vladivostok (Oktyabrskiy and Russkiy Islands, specifically) look a lot like Delaware, legally speaking,” Bear Markets Brief said in a note.

One issue with the scheme is that it will play badly with the public as the state bends over backwards to help the mega-rich keep their cash while the plunging ruble is hurting the man in the street, who will not receive any relief. In the last two days European manufacturers warned consumer electronics retailer M.Video that prices are likely to increase by 10%-15%, and travel agents report a fall in foreign holiday bookings by 40% this week due to the ruble devaluation.

Against this the Kremlin can set “but they are our businessmen (nashi)” and continue to play to Putin’s “fortress Russia” message that he used to excellent effect in the recent presidential elections in March.

So far only three significant businessmen have been directly affected out of two dozen men named on the list: metals magnate Oleg Deripaska, who owns Rusal and En+; Federation Council Senator Suleiman Kerimov, who's son Said owns Polyus Gold; and Viktor Vekselberg, who owns the Renova investment group that includes some listed assets in Austria. The share price of all their listed assets have tumbled and Deripaska has been particularly hard hit as he owns just over half the companies named in the SDN list.

Much uncertainty still surrounds the situation as it remains unclear how the names on the US Treasury list were chosen. While Deripaska is clearly a Kremlin insider and has received copious amounts of state support in the form of cheap loans and other help, the other two prominent men are not; indeed both have clashed with the Kremlin in the past and didn't obviously benefit from any government backed sweetheart deals. And maybe that is the point: without giving a clear rationale for sanctioning these businessmen in particular, investors are assuming that any Russian businessman could be targeted, which makes all Russian assets toxic again.

“The new punitive measure are expected to have an immediate negative impact on metal, mining, and weapons exports sectors, while also raising the borrowing costs for the Russian sovereign and businesses on capital markets,” IHS Global said in a note. “State support to sanctions-hit Russian firms is likely to mitigate the short-term risks of technical default on credit obligations, but in turn putting further pressures on Russia's already strained public finances.”

Russian stocks clawed back some of their losses on April 11 from the previous day’s drop, but bonds and the ruble remain down.

The Russian sovereign Eurobonds' average yield spread over the US Treasuries, on the JPMorgan EMBI Global Diversified widened to 199 basis points in the wake of the US Treasury announcement, up from 185 basis points before it. The news of the fresh sanctions once again pushed upwards the cost of insuring exposure to Russian debt. According to IHS Markit data, Russian five-year credit default swaps (CDS) were up by six basis points on April 9, from 127 bps when markets closed last Friday, April 6.

The ruble has been relatively stable in the past 12 months but it weakened from RUB57.6/$1.0 to RUB60.6/$1.0 after the markets opened on April 9. The ruble remained under pressure on April 11, as markets are assessing the scope of the impact of the new sanctions.

“Will inflation accelerate due to the ruble weakness? Of course, it would – but we tend to think that the effect might be fairly limited. If the ruble stabilises at the current spot level of RUB60/$in the next few months, this should add no more than 0.4-0.5pp to headline annual inflation by July. This implies that in this scenario annual inflation could remain at 2.5% in June and below 3% in July. Going forward, we already forecasted that CPI could print 3.5% at end-2018 in our base-case of $55/bl oil price, which assumed currency weakening to RUB61/$by the end of the year,” Oleg Kouzmin, Russia & CIS economist at Renaissance Capital said in a note.

The drop of the ruble has made another widely expected rate cut at the next monetary policy meeting of the Central Bank of Russia (CBR) on April 27 very unlikely say analysts. If the uncertainty persists there may be no more rate cuts this year at all. The CBR has also said it stands ready to intervene in the currency markets if the national currency suffers from more sanctions shocks.

“Russia's creditworthiness could become under pressure due to the heightened political risk and the market volatility, and subsequent new strains on its public finances. Specifically, Russia's Deputy Prime Minister Arkady Dvorkovich has already stated that the targeted large businesses will receive government support to ensure that no job losses happen,” IHS said in a note.

“We are very attentive to our leading companies, they are thousands of teams, very important jobs for our country," Dvorkovich said at a MOEX investors day in Moscow.