Megan Davies, Karin Strohecker

LONDON/NEW YORK – On Tuesday, the U.S. government increased restrictions on Russian government debt trading in an attempt to sanction Moscow for ratcheting-up its conflict with Ukraine. While this move may have a modest impact on the near term, analysts believe it could lead to harsher sanctions.

According to the U.S. Treasury, participation in secondary markets for bonds that were issued after March 1 was prohibited.

It stated that the increased restrictions regarding Russian sovereign debt transactions are intended to “further cut Russia off from revenue sources to fund its government, or President Putin’s priorities including his continued invasion of Ukraine,” in a statement.

These new restrictions came after Russia ordered troops to the separatist areas of eastern Ukraine. The West has threatened to take further action if Moscow invades its neighbour.

BlueBay Asset Management senior EM sovereign strategist Tim Ash stated that the U.S. message is clear: we do not want you to have Russian assets. “Get out of here now” is the message.

U.S.-based investors were banned from investing in new Russian dollars since the 2014 annexed Crimea. U.S.-based banks were also barred from the primary market for nonrouble sovereign bonds, since 2019.

Biden prohibited U.S. banks from being involved in Russia’s primary market for sovereign bonds worth rouble-denominated Russian rubles last year.

Ash said, “So we now have primary and secondary new issue rubles and dollar debts sanctioned.” If Russia invades fully-scale, the next step is to sanction existing issues second.

Biden claimed that Russia would be paying a greater price if they continue their aggression.

New measures taken to reduce rouble-debt, also known as their Russian abbreviation OFZ, may further strain the bonds. The 10-year yield benchmark broke the 10% threshold last week, and is currently almost at 11% — a six-year high.

Russian currency bonds suffered a slight increase in losses after U.S. sanctions were announced. However, investors demanded a premium to own Russian debt instead of safe-haven U.S. Treasuries. This was the highest since the COVID Market rout in spring 2020.

Moscow has downplayed the impact of secondary trading restrictions. The head of VTB State Bank, Andrey Kostin said that U.S. sanctions to Russia’s secondary OFZ bond market were not a threat to Russia’s financial stability. This is because Russian banks own more of these bonds than U.S. Investors.

Analysts at VTB reported Monday that the foreign percentage of OFZ holdings stood at 18%, according to their research.

Secondary market sanctions might limit Russia’s flexibility in financing its finances and foreign investments, but this wouldn’t have a significant impact on macro stability due to the large reserves and buffers. Fitch reported earlier this month that secondary market restrictions would affect Russia’s financial funding and foreign investment.

In a note to analysts at JPMorgan (NYSE) Jahangir Aziz, Jahangir Aziz said that a ban on the secondary trading of OFZs and sovereign Eurobonds – particularly if this was extended to persons not U.S. citizens – “could have a material effect on yields.”

He stated that Russia has a low financing need at 1.5% GDP. However, it would raise government financing costs as well as the risk premia to the private sector.