The financial sanctions adopted by Western countries on Russia on recognizing breakaway Ukrainian territories, including limiting Moscow’s ability to issue debt on international markets.
What impact will this have on investors and on Moscow?
How do countries finance themselves?
Most countries have to borrow large sums of money to finance their government spending. They issue debt obligations, which are called bills or bonds, and are bought by a range of investors, including banks, pension funds, insurers, and others. The term of the bond, the payment calendar and interest payments are determined in advance. This is called the primary debt market. In the secondary market, investors sell the debt among themselves.
Countries often issue new debt to repay callable bonds. This is called debt refinancing. As long as investors have confidence in a country, it can borrow at reasonable rates.
What do the sanctions change?
US investors will not be able to buy Russian bonds issued after March 1. Russia will also be banned from European markets to refinance its debt. Japan plans to ban both the placement of new Russian debt and the trading of its bonds on the secondary market. Canada has also banned trading in Russian bonds.
What other options for Russia?
“What they will do now is rely only on domestic sources and the domestic market, which is small, to fund itself,” said Kaan Nazli, an economist and asset manager who specializes in emerging market bonds at Neuberger Berman.
“If it was an emerging market like say Turkey or South Africa that are completely dependent on the financial market for their budget deficit, it would have been a much bigger problem, but because the Russian balance sheet is very strong… it’s not something that disruptive is for them,” he added.
What impact on the Russian debt?
For UBS economist Anna Zadornova, “the tax implications of the restrictions on new government debt issuance are mitigated by Russia’s low national debt”. At 16 percent, Russia’s government debt is low.
Zadornova also pointed out that Russia is benefiting from higher-than-planned revenues, partly due to high energy prices.
Russia also has the capacity to attract ruble-denominated debt on the domestic market.
According to Bloomberg data, foreign investors own just over a quarter of Russia’s government bonds.
Zadornova said the initial sanctions will apparently not force international investors to liquidate their holdings of existing Russian bonds, nor force their removal from bond indices.
Nevertheless, she said liquidity in the Russian bond market is likely to decline as investors worry about potential restrictions.
Russia’s finance ministry said on Wednesday it will evaluate market conditions to assess whether government bond auctions will be held in the coming weeks.
It canceled an auction to be held on Tuesday due to market volatility.