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By Katya Golubkova and Marc Jones
MOSCOW/LONDON, March 31 (Reuters) - U.S. President Joe
Biden's recent warning to Russia's Vladimir Putin against
election meddling and cyber hacks is raising expectations of
new, more biting sanctions on Russia's financial markets.
These could range from freezing the U.S. assets of people
close to Putin, all the way to curbing the Kremlin's ability to
issue debt.
Part of that latter option could be barring U.S. investors
from Russia's rouble-denominated debt, as they already are from
buying Moscow's dollar-denominated bonds. Here are some of the
possible consequences:
RUSSIAN TREASURY BOND BAN?
U.S. investors were banned from buying new
dollar-denominated Russian debt in 2014 after the Kremlin's
annexation of the Crimea region from Ukraine. Now
rouble-denominated debt, known by their Russian abbreviation
OFZ, could be added to that list, analysts have suggested.
Russia uses OFZs to finance its budget deficit. Total OFZ
issuance is 13.86 trillion roubles ($182.22 billion), central
bank data show. Foreign pension funds and other international
asset managers hold just over 3 trillion roubles worth, roughly
23%.
That share is the lowest it has been in five years. A year
ago, it was nearly 35%. Russian banks instead are
plugging the gap, last month buying over 40% of the debt issued
by the government.
U.S. funds would be allowed to keep existing OFZ holdings,
so only newly issued debt would be affected, although even that
could be complicated by the fact Russia often adds to, or
"taps", existing bonds rather than issue new ones altogether.
Russia expects to issue 3.7 trillion roubles ($48.65
billion) of OFZs this year, so how much would it matter if U.S.
investors were no longer buyers?
Central bank data shows nearly 7% of OFZs are held by U.S.
investors. Extrapolated to new sales, that would take away
almost $3.4 billion in demand.
If the UK joined the ban, that could be another 7% of demand
gone. The EU would be another 5%, although there is little
suggestion it would participate.
CAN RUSSIA ABSORB SANCTIONS ON OFZ?
Russia's finance ministry has downplayed the likelihood of
Biden sanctioning OFZ issuance but said it would be prepared for
such a move. .
Last week, it cancelled weekly OFZ bond auctions for the
first time since August after 10-year benchmark yields
- a proxy for borrowing costs - jumped to 7.36% in
the secondary market, the highest in almost a year.
VTB and Sberbank, Russia's two largest state-run banks, have
said they would be ready to increase their OFZ
holdings. VTB Chief Executive Andrey Kostin reckons
that with Russia’s ratio of public debt to gross domestic
product still only around 20%, the government could double its
debt to around 30 trillion roubles without much trouble.
Sberbank holds over 3 trillion roubles worth of OFZs and VTB
has over 900 billion roubles worth. Some other banks, such as
Otkritie, also hold significant amounts.
The central bank may also intervene, officials have said.
Finally, Russia's budget could get a 2 trillion-rouble boost
from higher oil prices. That should mean Moscow would eventually
need to borrow less. The 3.7 trillion-rouble borrowing plan
could be cut by as much as 700 billion, it has said.
.
WIDER IMPLICATIONS
Could sanctions on OFZ cause knock-on effects on big global
bond indexes run by the likes of JP Morgan and
Bloomberg-Barclays? Those indexes are tracked by funds managing
trillions of dollars worldwide and the ejection of a country can
have major ramifications.
It looks unlikely; after all Russian dollar debt wasn't
ejected from any indexes, despite being under sanction since
2014.
But ejection can also come down to what investors call
"liquidity issues", essentially whether there's enough trading
volumes in a particular market.
And Russia's share in JPMorgan's GBI-EM index, the main
global benchmark for emerging-market local currency bonds, has
been dropping over the past year.
It sits now at a still-substantial 7%, but it's down from
8.9% a year ago. Before the Ukraine crisis of 2014, Russia's
weight was 10%, the maximum allowed for a single country.
($1 = 76.0600 roubles)
(Reporting by Katya Golubkova in Moscow and Marc Jones in
London; editing by Larry King
Editing by)
