Sanctions risks with respect to Russia’s sovereign debt remain

Sanctions against Russia: Still Useful?

Sanctions risks with respect to Russia's sovereign debt remain

New US sanctions set the stage for more serious action against the Russian economy

After almost a year’s delay, the US presidential administration imposed a second round of sanctions against Russia, the reason for which was the attempted poisoning of former GRU colonel Sergei Skripal and his daughter Yulia in the UK in March 2018..

The Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, signed by then US President George W. Bush, imposes sanctions on states that use chemical or biological weapons in violation of international norms, obliged incumbent President Donald Trump to choose appropriate steps against the Kremlin.

Among the measures chosen are sanctions on Russia’s sovereign debt and a ban on American banks from lending to the Russian government; US opposition to the provision of financial or technical assistance to Russia from international financial organizations; and a ban on the export of chemical and biological products. Sanctions officially take effect after August 26 for at least a year, and the obstruction of US aid to Russia by international financial institutions will remain in force until Moscow complies with the requirements of the 1991 law..

Other sanctions measures that the US administration could choose were to restrict US imports of Russian goods, “which may include oil or any petroleum product,” reduce diplomatic relations between the US and Russia, and restrict air travel to the US by Russian Aeroflot..

When choosing the instruments of influence, the United States resorted to a number of exceptions, which, according to analysts, weakened the sanctions compared to how they are set out in the law. The most significant measure, according to experts, is the sanctions against the state debt of the Russian Federation..

Sanctions against Russian sovereign debt

The State Department has so far decided to impose sanctions only on new debt bonds of the Russian Federation, and the ban applies specifically to sovereign debt that is not denominated in rubles and on the primary market. Thus, American banks and investment firms, as well as divisions and offices of foreign financial institutions in the United States, will not be able to participate in the initial placement of RF debt securities, but can freely trade them on the secondary market after their initial placement. The new sanctions, analysts say, mostly concern the placement of Eurobonds, or Eurobonds, which are bonds issued by the government in foreign currency and placed on financial markets outside the country itself..

The new sanctions do not affect any of the Russian foreign currency bonds already in circulation, and do not affect federal loan bonds (OFZ) issued by the RF Ministry of Finance in rubles. The measure also does not apply to debt securities of Russian state-owned companies, if they are not already under sectoral sanctions..

“In essence, this means that Russia cannot issue new sovereign debt in dollars, but in recent years it has not done so,” notes Brian O’Toole, an expert at the Washington-based think tank Atlantic Council (Brian O’Toole, Atlantic Council), and a former employee of the Office of Foreign Assets Control (the division of the US Treasury Department dealing with sanctions policy). – I do not think that the new sanctions will have an impact on transactions in, say, euros. The fact that US banks will be able to trade Russian government bonds in the secondary market anyway significantly limits the impact of these sanctions. Interest on Eurobonds may rise slightly, but the sanctions do not impose significant restrictions on their issue. This is a kind of absolute minimum when it comes to sanctions on sovereign debt “.

As noted in a study by the consulting company Eurasia Group, this year Russia plans to issue OFZs in the amount of more than $ 30 billion, while Eurobonds – for $ 7 billion. Moreover, new loans on Eurobonds can only amount to $ 3 billion, the rest – as a result of the exchange of existing bonds. Russia may not issue Eurobonds without a serious threat to public finances, the company notes.

“OFZs account for the vast majority of what Russia plans to borrow,” says Zachary Wheatlin (Zachary Witlin), Senior Analyst, Eurasia Group. – OFZs are relatively attractive emerging market bonds for investors, including those from the United States. I think it is quite indicative that when choosing sanctions, the White House decided not to affect these investments. “.

Eugene Chausovski (Eugene Chausovsky), a senior expert at the analytical company Stratfor, also notes that the use of a number of exceptions against Russian sovereign debt and the emphasis on the primary market can be explained by the desire of the US administration to reduce the negative impact on foreign investors.

“It’s one thing to hurt the Russian economy, it’s another to deal with something like sovereign debt. I think that the focus on the primary market was made precisely in order to avoid negative impact on foreign investors, including American ones, ”says Eugene Chausovski.

However, as analysts note, there is still a negative effect of the imposed sanctions, and there are also sanctions risks in relation to Russian sovereign debt in the future..

“These sanctions complicate the purchase of Russian Eurobonds and support the threat of new sanctions in the future if relations between the US and Russia deteriorate further,” notes Zachary Wheatlin..

Sanctions risks with respect to Russia's sovereign debt remain

However, the Eurasia Group analyst does not expect a serious reaction from Russia..

“The Russian side understands that these measures did not significantly affect their ability to issue debt or take out loans,” says Zachary Wheatlin..

International financial institutions and a ban on the export of goods

Sanctions stipulating Washington’s opposition to the provision of financial or technical assistance to Russia by international financial organizations apply to those institutions of which the United States is a member, such as the IMF, the World Bank or the European Bank for Reconstruction and Development..

According to experts, this sanction measure is quite symbolic, since along with the United States, many other countries are members of international financial organizations. Also, today Russia does not receive and does not need financial assistance from these institutions..

“The United States is just one voice among many other countries in these organizations, and I don’t think Washington has veto power,” says Brian O’Toole. “Moreover, the United States would not have voted for financial or technical assistance to Russia anyway. So, this is basically a meaningless sanction “.

“Russia has no financial loans from the World Bank or the IMF. This sanction is rather symbolic, says Eugene Chausovski. – Russia has quite good macroeconomic indicators, and it has a budget surplus. Moscow does not need financial assistance from international financial organizations, at least for the time being. “.

The sanctions do not affect those international institutions where there is no US participation, such as the European Investment Bank, created by the EU member states, or the BRICS New Development Bank, founded by Brazil, Russia, India, China and South Africa.

As for the ban on the export of a group of chemical and biological products from the United States to Russia, experts note that these sanctions also do not have serious consequences..

“These goods were not exported to Russia anyway,” says Brian O’Toole, adding that often the end users of these products are those state-owned enterprises that are already subject to US restrictions..

According to Eugene Chausovsky, although the new sanctions have not yet had a strong impact on the Russian economy, they are not harmless.

“Russia has been working for several years to insulate its economy from the impact of the sanctions,” stresses an analyst at Stratfor. – We saw a number of measures: building up foreign exchange reserves, reducing debt obligations, getting rid of US government bonds, reducing transactions in US dollars. Anything to counter stricter US sanctions. I do not think that these new sanctions will have serious economic consequences for Russia, but I still would not call them meaningless “.

“The same sanctions on Russia’s sovereign debt have been discussed in the United States for a long time, and we see, at least, initial steps in this direction,” the expert adds..

As for a number of other sanctions bills pending in Congress, analysts do not expect their adoption in the near future and in their original form. According to experts, the new sanctions measures, if adopted, will be the result of a compromise between a tougher position of Congress and a less tough one on the part of the US administration. An exception may be sanctions against the Nord Stream-2 gas pipeline under construction by Russia..

  • Valeria Jegisman

    Voice of America journalist. Prior to that, she worked for international non-governmental organizations in Washington and London, in the Russian-language version of the Estonian daily newspaper “Postimees” and as a spokesman for the Estonian Ministry of Internal Affairs. Interests – international relations, politics, economics

World news