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Western investors are removing US bond sanctions from Russia

Western investors are removing US bond sanctions from Russia

The Biden administration’s sanctions against Moscow sparked a brief sensation in Russia’s financial markets on Thursday, but foreign analysts and investors hope the country will avoid more lasting damage.

It fell more than 2 percent of the ruble when it first learned of new U.S. sanctions, and a ban on U.S. institutions from participating in new Russian sovereign bond issues posed a key risk that hung in Moscow’s markets.

But by the time the markets closed, the currency was almost fully recovered, trading at more than $ 76 a dollar. It rose another 1 per cent on Friday in London trade.

Fund managers said the reduction in new problems could be the lightest action the White House could take against Russia’s debt.

“The devil you know is much better than uncertainty,” said Viktor Szabok, investment director at Aberdeen Standard Investments. “The worst expectations were not realized. It’s unpleasant but it won’t do anything to really shake up the Russian economy. “

After the sanctions on Moscow, investors in Russia’s sovereign assets are among the most attractive offers in the markets where high yields and low debt levels in the country are still emerging. With the US refusing to focus on secondary trading in Russian bonds, most are ready to go.

Russia’s finance ministry said on Thursday it would hold a debt auction “under market conditions” before the sanctions go into effect on June 14, after which it will issue a new debt after the debt’s secondary bids are completed.

Moscow has held a show of strength to indicate that its state-owned banks can make up for lost foreign demand. VTB, Russia’s second-largest lender, bought 72% of its last head debt issue this week.

The sanctions are a “symbolic measure” that promotes “financial autocracy,” according to Elina Ribakova, deputy economist at the International Finance Institute. “Carrots are gone – there is no chance of a reversal of any sanctions – and the US is increasingly without a stick. Local banks will buy Russian debt at the first level [market] and sell it to other banks and asset managers. ”

In the short term, Russia could be forced to cut its debt plans moderately and raise interest rates at its next central bank meeting on Friday, said Sofya Donets, chief economist at Renaissance Capital. “They are not going to do anything more radical, because [the sanctions] they can be digested without significant systemic risk to the financial stability that the market can still afford, ”he said.

The move is the second set of U.S. measures against Russia’s debt, after Washington sanctioned the Russian government’s foreign currency bonds in 2019. This gradually sold all the assets of the Russian state: foreign shares in OFZs issued by the finance ministry, denominated in rubles. , fell from 35 per cent last February to 20 per cent this month, the lowest proportion in five years.

However, the head of research at the company Gustmore Medeiros Ashmore said that the secondary market of Russian foreign currency bonds remains active. “In the short term, even institutional investors in the U.S. will not be shy about operating in the primary market,” he said. “However, once the dust has settled and a new foreign policy balance has been found, non-US investors can once again take part in major auctions.”

The biggest threat to Russia’s assets, investors said, would be new geopolitical tensions that would push the U.S. to ban trade in the secondary market. “The risk, of course, is direction,” said Richard House, director of debt investment for emerging markets at AllianzGI.

For now, however, Szabok said the markets have not seen the level of sales one might expect if investors were worried about sanctions targeting the second market.

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