For investors in Russia, US sanctions will not pack the same punch as before
LONDON/NEW YORK: A threat to impose sanctions on Russian sovereign debt transactions is one of the biggest financial weapons that the US can deploy against the Kremlin, but Moscow’s slide down the investment league table in recent years means the move will not pack the punch it once would have.
A bipartisan group of US senators introduced legislation on Thursday aimed at penalising Russia for interference in recent elections, something the Kremlin strongly denies, as well as for its annexation of Crimea and actions in Syria.
The sanctions would need to be passed by the full House and receive President Donald Trump’s signature, but if they do become a reality it would mark a new low in relations between the former Cold War foes.
They would also hit the energy sector, Russian uranium imports and a host of oligarchs, but it is a move to ban purchases of any new Russian sovereign debt going forward that has raised the most eyebrows.
It is considered one of Washington’s most potent tools because it would effectively freeze the Russian government out of international borrowing markets, creating a similar scenario to that faced by Argentina for a decade until 2015, following a default and a US court ruling against it.
The measure may create fewer problems for Russia though than were faced by Argentina, given Russia has one of the lowest debt levels in the world and nearly half a trillion US dollars in reserves thanks to huge oil and gas export revenues.
Russia is also used to belttightening during difficult times and has sharply cut back on issuing dollar debt after the Ukraine crisis. In addition, Russia features less in emerging market investors’ portfolios than it did even five years ago.
“Russia is still an overweight for most people at the moment, but this isn’t going to kill the fund industry by any means,” said Peter Kisler, an emerging market debt manager at North Asset Management.
As overseas borrowing by the Russian government and companies has shrunk, so has the country’s weighting on bond indexes that are used by investors.
For instance, Russia comprises just 3.6 per cent of JPMorgan’s EMBI Global “hard currency” sovereign bond index, compared to 9.0 per cent in 2007. — Reuters