Biden imposes tough new sanctions on Moscow

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Russia assets sold off on Thursday after reports that US president Joe Biden was set to announce a fresh round of sanctions against Moscow, potentially targeting the country’s sovereign debt.

Washington is set to unveil the new measures, the first against Russia from the Biden administration, to punish Moscow for alleged meddling in US elections and hacking attacks, US media reported citing unnamed officials.

They will target several individuals and organisations, result in the expulsion of 10 Russian diplomats from the US and could include restrictions on trading in newly issued rouble-denominated state debt, known as OFZs, according to the reports, which a diplomatic source confirmed to the FT.

The rouble dropped as much as 2.2 per cent in early trading on Thursday to about 77.5 to the US dollar. It later trimmed some of its initial losses and was down 1.5 per cent to trade at 76.92 by 9am London time.

Moscow’s benchmark Moex stock index was down 1.1 per cent, while the market’s dollar-denominated RTS index was 2.8 per cent lower.

The country’s benchmark 10-year bond yield rose 0.19 of a percentage point to 7.24 per cent, although it remained below a recent high of 7.3 per cent. The increase in yield points to a decline in price.

Thursday’s fall in the Russian currency erased gains made earlier in the week after a Tuesday call between Biden and his counterpart Vladimir Putin, when the leaders discussed a potential joint summit aimed at easing tensions between two countries.

The Kremlin said it would wait for official confirmation of the measures before commenting on their impact, adding that Russia would respond in kind.

“We condemn any desire for sanctions. We consider them illegal. In any case, the principle of reciprocity in this matter applies,” Dmitry Peskov, Putin’s spokesman told reporters, adding that fresh sanctions could hinder efforts to arrange the planned summit between the two leaders.

The new package of sanctions, which would add to an extensive list of restrictions first imposed in 2014 after Moscow’s annexation of Crimea, has been long expected.

The Biden administration began drawing up measures to punish Russia after US intelligence officials said a large-scale hack of at least nine federal agencies and about 100 companies, referred to as the SolarWinds hack, was “likely of Russian origin”.

The US has also condemned the recent arrest and jailing of Russian opposition activist Alexei Navalny after his recovery from a suspected assassination attempt, and accused Moscow of threatening Ukraine by deploying tens of thousands of troops to the country’s border.

“We expect strong sell-offs on the market today and the rouble rate to weaken sharply, at least until the information about the sanctions becomes clearer,” John Walsh, equity strategist at Alfa-Bank, wrote in a note to clients. “In principle, American companies should be allowed to buy OFZs on the secondary market; if this is made clearer, it might ease the pressure on the Russian market.”

The share of Russia’s rouble-denominated Treasury bonds held by foreigners fell to a more than five-year low of 20.2 per cent in March, down from more than 30 per cent just a year earlier.

“Levying draconian sanctions on Russian bonds, arguably, would be inconsistent with Biden’s offer for a bilateral summit to ‘normalise’ relations,” BCS Global Markets wrote in a note to clients on Thursday morning. “Yet, tension between the west and Russia over Ukraine lingers, with uncertainty weighing on the risk trade.”

The sanctions will test the Russian finance ministry’s plans to soften the impact of restrictions against its sovereign debt. Potential countermeasures include a possible pause in issuance and regulatory easing for Russian borrowers, deputy finance minister Vladimir Kolychev told the FT late last year.

The ministry is also confident it can replace foreign OFZ holders entirely if need be through domestic demand.

After cancelling a bond sale in March due to market volatility amid sanctions fears, Russia sold a record Rbs354bn ($4.6bn) in OFZs a week later, with most of the issue going to Kremlin-run banks.

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