By Darya Korsunskaya

MOSCOW, (Reuters) – Any increase in western sanctions against a Russian domestic bond market already under pressure would mean that borrowing costs for the government will rise and could cause significant volatility short term.

A strong investor base in the country means that market where a political driven selloff sent benchmark rouble yields up to six years highs would be able to withstand tougher curbs. Timur Maksimov spoke with Reuters and said that the 2022 issuance plan of the ministry remained on track.

Russia has massed around 100,000 troops near the Ukrainian border while denying it plans to invade https://www.reuters.com/world/europe/us-urges-de-escalation-over-ukraine-offers-russia-diplomatic-path-2022-01-27. Western countries are threatening new economic and financial sanctions if Russia does.

Existing sanctions prohibit U.S. investors from purchasing new OFZ bonds and U.S. bank from buying sovereign Eurobonds from Russia.

Officials from the United States have suggested that the bans could be extended to include secondary market trading in new instruments.

The finance ministry cancelled OFZ auctions Tuesday for the second week in a row as an ongoing sale drove 10-year yields up to their highest level since 2016.

Maksimov stated that auctions will be resumed once the market “normalizes”. He also said that current volatility is due to politics and not economics. “This situation cannot last forever.”

If foreign investors were to sell their entire OFZs (equivalent to less than one fifth of the total market holdings), then disruption would not occur.

The new sanctions will lead to volatility short-term, but they will have no lasting impact on the fundamentals. Maksimov stated that even though we remove 19% from the portfolio, there are still 80% held by domestic investors.

He stated that the finance ministry plans to continue raising 3.3 trillion rubles ($41.5 billion in OFZ bonds) this year. This will include reintroducing floating coupons bonds in addition to fixed-coupon OFZs.

($1 = 79.5984 roubles)