Western investors sweep US sanctions against Russia on bonds

The Biden administration’s sanctions against Moscow triggered a brief swing in Russian financial markets on Thursday, but analysts and foreign investors expect the country to avoid more lasting damage.

The ruble initially fell more than 2% when news of impending US sanctions broke, and the decision to ban US institutions from participating in further Russian sovereign bond issues brought the realization of a major risk. weighing on the Moscow markets.

But by the close of markets, the currency had almost fully recovered, trading just above 76 per dollar. It climbed an additional 1% in London trading on Friday.

Fund managers say the new issuance restrictions were possibly the lightest action the White House could have taken against Russia’s debt.

“The devil you know is better than uncertainty,” said Viktor Szabo, chief investment officer at Aberdeen Standard Investments. “The worst expectations did not materialize. It’s unpleasant but it will do nothing to really shake up the Russian economy.

Scarred by battle after years of sanctions against Moscow, investors in Russian sovereign assets say the country’s high yields and low debt levels still make bonds one of the most attractive offers in emerging markets. With the United States refusing to target secondary trading in Russian bonds, most of it is prepared to hang in there.

Russia’s finance ministry said on Thursday it would hold debt auctions “based on market conditions” before sanctions go into effect on June 14, and then issue new debt only after ending. to secondary offers of existing debt.

Moscow has made a show of force to indicate that its state-owned banks can make up for any lost foreign demand. VTB, Russia’s second-largest lender, bought 72 percent of the latest sovereign debt issue this week.

Sanctions are “a largely symbolic measure” that entrenched “financial autocracy,” said Elina Ribakova, deputy chief economist at the Institute for International Finance. “The carrots are gone – there is no way to reverse the sanctions – and the United States is running out of sticks more and more. Local banks will buy Russian debt on primary [market] and resell it to other banks and asset managers. “

In the short term, Russia may be forced to moderate its borrowing plans moderately and raise interest rates at the next central bank meeting, a week from Friday, said Sofya Donets, chief economist of Renaissance Capital. “They won’t have to do anything more radical, because [the sanctions] are something the market can still digest without any significant systemic risk to financial stability, ”she said.

The move is the second round of US measures against Russian debt after Washington sanctioned the Russian government’s foreign currency obligations in 2019. It caused a gradual liquidation of all Russian state assets: OFZ’s foreign holdings issued by the Ministry of Finance, which are denominated in rubles. , fell from 35 percent last February to 20 percent this month, the lowest proportion in five years.

Still, Russia’s secondary currency bond market remains active, said Gustavo Medeiros, deputy director of research at Ashmore. “In the short term, even non-US institutional investors will be reluctant to act in the primary market,” he said. “However, once the dust settles and a new foreign policy balance is struck, non-US investors can once again participate in the primary auctions.”

The biggest threat to Russian assets, according to investors, is new geopolitical tensions leading the United States to ban secondary market trading. “Risk is obviously the direction,” said Richard House, investment director for emerging market debt at AllianzGI.

So far, however, Szabo said the markets had not seen the level of selling that could be expected if investors worried about sanctions targeting the secondary market.