Western investors have banned US bond sanctions on Russia

The Biden administration’s sanctions against Moscow on Thursday sparked a brief upheaval in Russia’s financial markets, but foreign analysts and investors expect the country to inflict more permanent losses.

News of the impending U.S. sanctions spread and the decision to ban U.S. companies from participating in the new issue of the Russian Sovereign Issues Paper brought a significant risk to the Moscow market.

However, as markets closed, the currency almost completely recovered, trading just above 76 against the dollar. Fund managers say the new issue sanctions are likely to be the mildest action the White House has taken against Russia’s debt.

Victor Sajabo, investment director at Aberdeen Standard Investments, said, “You know that devil is much better than uncertainty.” It’s unpleasant but it’s not going to do anything to really shake the Russian economy. ”

After years of sanctions against Moscow, Russia’s sovereign asset investors say high yields and the country’s low levels of debt still make bonds the most attractive offer in emerging markets. While the U.S. refuses to target the second trade of Russian bonds, most are ready to block it.

Russia’s finance ministry said on Thursday that market auctions would be held “depending on market conditions” before the sanctions take effect on June 14, after which a second offer of existing debt would be finalized and a new one would be issued.

Moscow has shown strength in understanding that its state-owned banks can meet any lost foreign demand. VTB, Russia’s second-largest lender, bought 72 percent of the largest sovereign debt issue this week.

The sanctions are “a broader symbolic step” that “necessitates financial dictatorship,” said Elena Rybakova, deputy chief economist at the Institute for International Monetary Fund. “The carrots are gone – there is no way to get the sanctions back – the United States is on the run. Local banks will buy Russian debt on primary. [market] And sell it to other banks and asset managers.

Sophia Donets, chief economist at Renaissance Capital, said that in the short term, Russia could be forced to cut its mid-level borrowing plans by a week after Friday and raise interest rates at the next central bank meeting. “They don’t have to do anything more basic, because [the sanctions] Something that the market can still digest without any systemic risk for financial stability. “

Washington is the second set of US measures against Russia since it approved Russia’s official foreign exchange bonds in 2016. , Down from 20 percent last February to 20 percent this month, the lowest proportion in five years.

However, the secondary market for Russian foreign exchange bonds remains active, said Gustavo Medieros, deputy head of research at Ashmore. “In the short term, even non-US firms will find investors ashamed to act in the primary market,” he said. “However, once the dust settles and a new foreign policy balance is found, non-US investors can participate in the initial auction again.”

Investors said the biggest threat to Russia’s assets was fresh geopolitical tensions that prompted the United States to ban trade in secondary markets. “Risk is clearly the direction,” said Richard House, chief investment officer at AllianzGI’s Emerging Markets.

For now, however, Sajabo said investors did not see the market as expected to sell if they were concerned about sanctions targeting the secondary market.

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