Russian Markets Dive as U.S. Plans Sanctions on Sovereign Bonds

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Russian Markets Dive as U.S. Plans Sanctions on Sovereign Bonds

Anya Andrianova and Kira Zavyalova
·3 min read

(Bloomberg) -- Russian markets tumbled as the U.S. prepared to unveil sanctions on the nation’s local debt, a threat that’s put a damper on investor appetite for years.

The yield on benchmark ruble bonds jumped the most since the pandemic turmoil last March. Stocks snapped three days of gains and the ruble dropped the most since December.

Bond sanctions are the latest blow to investor confidence in Russia and come at a time of heightened tensions with troops building on the border with Ukraine. The package of restrictions would include barring U.S. financial institutions from participating in the primary market for new Russian bonds, according to a person familiar with the matter.

“Sanctions will spark panic sales of ruble bonds and pressure the ruble,” said Tatiana Orlova, an analyst at Emerginomics in London. “But in the medium term, the fact that one of the biggest risks has finally materialized could actually reduce the geopolitical premium. Certainty is always better than uncertainty. Paradoxically, the outlook for the ruble may improve.”

Geopolitics and Russia’s spiraling tensions with the West were one of the reasons JPMorgan Chase & Co. cut its recommendation for emerging-market currencies to underweight.

Read More: Putin’s Ukraine Gambit Turns Debt Sanctions Into a Real Threat

The U.S. government is also planning sanctions focusing on Russian individuals and entities, which could be announced as early as Thursday. Those come in retaliation for alleged Kremlin misconduct including the SolarWinds hack and efforts to disrupt the U.S. election.

Russian officials say debt curbs wouldn’t seriously hurt the government’s ability to fund itself as local banks and non-U.S. investors could step in to replace those forced to sell. State lender VTB Bank PJSC bought more than 70% of the local notes on offer in Wednesday’s debt sales, which saw a record placement equivalent to almost $3 billion.

Foreigners now hold about a fifth of the so-called OFZ debt, worth roughly $37 billion.

It would be an “important mitigating factor” if restrictions are limited to primary-market purchases, according to Oxford economics analysts Evghenia Sleptsova and Regis Chatellier. They pointed to sanctions in 2019 that banned U.S. banks from buying new issues of Russian Eurobonds, but which ultimately did little to dent the Kremlin’s access to foreign funding.

“In contrast, the degree of the selloff of Russian assets in anticipation of Biden’s presidency and subsequent sanctions has already been much more substantial,” they said. “Once primary market purchases of OFZ debt are sanctioned, domestic banks can absorb new issuance, and then resell on the secondary market.”

Market Snapshot:

Yields on Russia’s 10-year ruble bonds were up 18 basis points at 7.22% as of 1:56 p.m. in Moscow, set for the biggest increase since AugustThe ruble traded 1.3% weaker at 76.8625 per dollarRussia’s benchmark MOEX stock index retreated 0.7%

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