U.S. Sanctions Sink Russian Ruble, Bonds as New Sanctions Planned

U.S. Sanctions Sink Russian Ruble, Bonds as New Sanctions Planned

The yield on OFZ bonds due in 10 years jumped 27 basis points, the most since the peak of the pandemic-driven market turmoil over a year ago. The ruble dropped the most since December.

Planned measures include barring U.S. financial institutions from trading new debt issued by the Russian central bank, Finance Ministry and sovereign wealth fund, according to a person familiar with the matter. The person familiar with the package of sanctions expected to be announced this week said the precise timing of the bond measures wasn’t clear.

“It is OFZ- and ruble-negative in the near-term,” ING Groep (AS:INGA) NV economist Dmitry Dolgin said from Moscow. “The market has been speculating on the likelihood of that for a couple of years, and since mid-2020 the perceived risk of sanctions went up, and the ruble’s discount to its emerging-market and commodity-producing peers doubled.”

Once seen as too big a risk for markets, the bond sanctions are becoming a reality after Russia’s troop buildup on the border with Ukraine sent tensions with the West spiraling. Penalties focusing on Russian individuals and entities could be announced as early as Thursday and come in retaliation for alleged Kremlin misconduct including the SolarWinds hack and efforts to disrupt the U.S. election.

Analysts at JP Morgan Chase (NYSE:JPM) & Co. downgraded the ruble and Russian bonds last week, citing the escalating tensions and the risk that U.S. investors might close long positions on OFZs. The Finance Ministry has had to rely on state-run banks to meet demand at its latest debt auctions, and VTB Bank PJSC bought more than 70% of the local notes on offer in sales on Wednesday.

Russian officials say bond sanctions wouldn’t cause much damage to Russia’s financial markets because local banks and non-U.S. investors would step in to replace those forced to sell. A move to ban U.S. banks from buying new issues of Russian Eurobonds in 2019 did little to dent the Kremlin’s access to foreign funding.

“Fundamentally, OFZ sanctions are not a threat to financial stability as the local banks have the capacity to absorb the Minfin placement volumes,” Dolgin said. “But it would affect prices through reduced demand, because in successful years, non-residents bought out two-thirds of the placement volumes.

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