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US sanctions have not yet frightened foreign investors

The Biden administration’s sanctions against Moscow have sparked short-term volatility in Russian financial markets, but analysts and investors believe the country will avoid long-term damage.

The ruble fell more than 2% after news of impending US sanctions broke out. The Biden administration decided to ban American institutions from buying new Russian government bonds.

Markets quickly realized the risks but quickly recovered from the shock. According to fund managers, the new emission restrictions are probably the softest measure taken by the White House against the Russian debt.

“Compared to uncertainty, it’s better to choose the lesser of two evils,” said Victor Szabo, chief investment officer at Aberdeen Standard Investments. – The worst expectations were not met. It is unpleasant, but such actions cannot really destroy the Russian economy. “

Symbolic measures

Investors in Russian sovereign assets, hit by years of sanctions against Moscow, note that the country’s high yields and low debt levels continue to make these bonds one of the most attractive in emerging markets. Since the US did not restrict secondary market trading in Russian bonds, most of them will be able to withstand.

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On Thursday, the Russian Finance Ministry said it would hold bond auctions “subject to market conditions” before the sanctions take effect on June 14, and then issue new debt only after the completion of additional issuance of existing debt. Moscow has shown strength by showing that state-owned banks can make up for lost external demand. VTB, Russia’s second largest lender, bought 72% of the sovereign debt issued this week.

The sanctions are “largely a symbolic measure” that bolsters “financial autocracy,” said Elina Rybakova, deputy chief economist at the Institute of International Finance. She also added that “the gingerbread is over, and it will not be possible to lift the sanctions; but the United States has practically no whips left. Local banks will buy Russian debt on the primary market and sell it to other banks and asset management companies.

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Russia may have to cut back on borrowing plans in the short term and raise interest rates at the next Central Bank meeting, said Sophia Donets, chief economist at Renaissance Capital.

She also added that they would not have to take more drastic measures as the market could still digest [санкции] without significant systemic risks to financial stability.

Future risks

This is the second US package of measures against Russian debt since Washington imposed sanctions on Russian government foreign exchange bonds in 2019. This led to a gradual sale of all Russian state assets: foreign participation in OFZs issued by the Ministry of Finance and denominated in rubles fell from 35% in February last year to 20% this month, which is the lowest level in the last five years.

Nevertheless, the secondary market for Russian foreign exchange bonds remains active, according to Gustavo Medeiros, deputy head of research at Ashmore.

“In the short term, even non-US institutional investors will avoid the primary market,” he said. “However, when the passions subside and the foreign policy equilibrium is re-established, non-US investors will be able to participate in the primary auctions again.”

According to investors, the main threat to Russian assets will be a new round of geopolitical tensions, which will force the United States to ban trading in the secondary market.

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“The risk is clearly associated with further escalation,” said Richard House, CIO of Emerging Markets Debt at AllianzGI.

However, according to Szabo, so far the markets have not faced large-scale sales. But they are still possible if the United States imposes sanctions on the secondary market. According to analysts from the Fitch rating agency, such measures will exclude Russia from the number of world indices and provoke a significant capital outflow.

The ruble fell sharply on Monday amid the escalation of the geopolitical conflict. Recall that the United States threatened Russia with new sanctions if Navalny dies in prison.

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