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The “nuclear option” of the US sanctions could send the ruble far beyond 83 to the dollar

Schedule ruble to dollar at intervals of 1 week

The ruble has suffered the most tangible losses against the dollar since March 23 after news of a possible extension of sanctions on the Russian national debt. The ruble fell below the level from which it soared after the news of the conversation between the presidents of the Russian Federation and the United States.


“If new sanctions are introduced against OFZs in the primary market, then the reaction will certainly be large-scale, as in the case of Rusal in 2018,” says Iskander Lutsko, chief investment strategist at ITI Capital. The ruble may approach 83 and above at the moment, a sharp drop in OFZs, which are already cheap, is possible. “The restoration will depend on the reaction of the Russian authorities: if it is soft, they will buy it back, and if the meeting with Biden is canceled and the rhetoric is harsh, the pressure will increase.”


Russian bonds have sagged the most since March last year as the US prepares to announce sanctions on Russia’s sovereign debt, what it calls the “nuclear option” that has dulled investor appetite for the Russian market for years. The yield on OFZ bonds maturing in 10 years jumped 27 basis points, the highest spike since the peak of the market turmoil caused by the pandemic more than a year ago.

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Planned measures include a ban on US financial institutions from trading in new debt issued by the Russian central bank, Treasury Department and the National Wealth Fund, according to a person familiar with the matter. An official familiar with the sanctions package expected to be announced this week said the exact timing of the bond action was not clear.


“In the short term, this package of sanctions will be negative for OFZs and the ruble,” says Dmitry Dolgin, economist at ING Groep NV. “The market speculated on the likelihood of this for several years, and since mid-2020, the perceived risk of sanctions has increased, and the discount of the ruble to EM peers and commodity producers has doubled.”


Once viewed as too much of a risk for the markets, bond sanctions are becoming a reality after a buildup of Russian troops on the border with Ukraine has raised tensions with the West.

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Sanctions against Russian individuals and legal entities could be announced as early as Thursday in response to alleged Kremlin actions, including the SolarWinds hack and attempts to disrupt US elections.

Analysts at JP Morgan Chase & Co. last week they downgraded the rating of ruble and Russian dollar bonds, citing escalating tensions and the risk that US investors could close long positions in OFZ.

The Ministry of Finance had to rely on state-owned banks to meet demand in its latest debt auctions, and PJSC VTB Bank bought more than 70% of local debt securities during the sale on Wednesday.

Russian officials say bond sanctions won’t do much damage to Russian financial markets because local banks and non-US investors will step in to replace those forced to sell. Actions to ban US banks from buying new issues of Russian Eurobonds in 2019 had little impact on the Kremlin’s access to foreign funding.

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“In fact, OFZ sanctions do not pose a threat to financial stability, since local banks have the opportunity to absorb the volume of the Ministry of Finance’s placement,” Dolgin said. “But this will affect prices due to lower demand, because in successful years, non-residents bought out two-thirds of the volume of placement.”


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