US president Joe Biden has imposed sweeping new sanctions against Russia including long-feared measures targeting its government debt in a sharp escalation of Washington’s confrontation with Moscow.
News of the measures sparked a sell-off in Russian assets and a warning from the Kremlin that they could scupper efforts to reduce tensions between the two countries.
The first anti-Russian measures from the Biden administration include a directive banning US financial institutions from trading in newly issued Russian state debt, known as OFZs, and bonds issued by the Russian central bank and National Wealth Fund. The ban affects debt issued after June 14.
The package also includes restrictions on more than two dozen individuals and organisations accused of interfering in recent US elections, as well as Russian technology companies alleged to support the country’s intelligence services, which have been accused of a recent cyber attack on the American government.
Measures targeting new state debt have long been viewed as a major milestone in the US sanctions regime against Russia, which has steadily expanded since the first round of restrictions were imposed by the Obama administration in response to Moscow’s 2014 annexation of Crimea.
The new sanctions package will seek to punish Moscow for alleged meddling in US elections and hacking attacks, and comes after strong condemnation from Washington and other Nato powers over Russia’s heavy military build-up close to its border with Ukraine.
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 76.89 by midday London time.
The fall 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.
Moscow’s benchmark Moex stock index was down 0.7 per cent, while the market’s dollar-denominated RTS index was 2.4 per cent lower.
The country’s benchmark 10-year bond yield rose 0.19 of a percentage point to 7.24 per cent, a touch below recent highs. The increase in yield points to a decline in price.
The Kremlin said earlier on Thursday 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 scupper efforts to arrange the planned summit between the two leaders.
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”.
Russia has denied involvement in the hack and said it had never attempted to influence foreign elections.
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.
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 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 that, if needed, it can replace foreign OFZ holders entirely through domestic demand.
After cancelling a bond sale in March due to market volatility and sanctions fears, Russia sold a record Rbs354bn ($4.6bn) in OFZs a week later, with most of the issue going to Kremlin-run banks.
