EXPLAINER-What if U.S. sanctions target Russia's OFZ government bonds?


By Katya Golubkova and Marc Jones

MOSCOW/LONDON, March 31 (Reuters) - U.S. President Joe Biden's recent warning to Russia's Vladimir Putin against election meddling and cyber hacks is raising expectations of new, more biting sanctions on Russia's financial markets.

These could range from freezing the U.S. assets of people close to Putin, all the way to curbing the Kremlin's ability to issue debt.

Part of that latter option could be barring U.S. investors from Russia's rouble-denominated debt, as they already are from buying Moscow's dollar-denominated bonds. Here are some of the possible consequences:


U.S. investors were banned from buying new dollar-denominated Russian debt in 2014 after the Kremlin's annexation of the Crimea region from Ukraine. Now rouble-denominated debt, known by their Russian abbreviation OFZ, could be added to that list, analysts have suggested.

Russia uses OFZs to finance its budget deficit. Total OFZ issuance is 13.86 trillion roubles ($182.22 billion), central bank data show. Foreign pension funds and other international asset managers hold just over 3 trillion roubles worth, roughly 23%.

That share is the lowest it has been in five years. A year ago, it was nearly 35% . Russian banks instead are plugging the gap, last month buying over 40% of the debt issued by the government.

U.S. funds would be allowed to keep existing OFZ holdings, so only newly issued debt would be affected, although even that could be complicated by the fact Russia often adds to, or "taps", existing bonds rather than issue new ones altogether.

Russia expects to issue 3.7 trillion roubles ($48.65 billion) of OFZs this year, so how much would it matter if U.S. investors were no longer buyers?

Central bank data shows nearly 7% of OFZs are held by U.S. investors. Extrapolated to new sales, that would take away almost $3.4 billion in demand.

If the UK joined the ban, that could be another 7% of demand gone. The EU would be another 5%, although there is little suggestion it would participate.


Russia's finance ministry has downplayed the likelihood of Biden sanctioning OFZ issuance but said it would be prepared for such a move. .

Last week, it cancelled weekly OFZ bond auctions for the first time since August after 10-year benchmark yields RU10YT=RR - a proxy for borrowing costs - jumped to 7.36% in the secondary market, the highest in almost a year.

VTB and Sberbank, Russia's two largest state-run banks, have said they would be ready to increase their OFZ holdings. VTB Chief Executive Andrey Kostin reckons that with Russia’s ratio of public debt to gross domestic product still only around 20%, the government could double its debt to around 30 trillion roubles without much trouble.

Sberbank holds over 3 trillion roubles worth of OFZs and VTB has over 900 billion roubles worth. Some other banks, such as Otkritie, also hold significant amounts.

The central bank may also intervene, officials have said.

Finally, Russia's budget could get a 2 trillion-rouble boost from higher oil prices. That should mean Moscow would eventually need to borrow less. The 3.7 trillion-rouble borrowing plan could be cut by as much as 700 billion, it has said. .


Could sanctions on OFZ cause knock-on effects on big global bond indexes run by the likes of JP Morgan and Bloomberg-Barclays? Those indexes are tracked by funds managing trillions of dollars worldwide and the ejection of a country can have major ramifications.

It looks unlikely; after all Russian dollar debt wasn't ejected from any indexes, despite being under sanction since 2014.

But ejection can also come down to what investors call "liquidity issues", essentially whether there's enough trading volumes in a particular market.

And Russia's share in JPMorgan's GBI-EM index, the main global benchmark for emerging-market local currency bonds, has been dropping over the past year.

It sits now at a still-substantial 7%, but it's down from 8.9% a year ago. Before the Ukraine crisis of 2014, Russia's weight was 10%, the maximum allowed for a single country.

($1 = 76.0600 roubles)

Ownership of Russian OFZ market by investors around the worldhttps://tmsnrt.rs/3czGOG2

Sanctions worries have been pushing up Russia risk gaugeshttps://tmsnrt.rs/3ryVLMD

GRAPHIC-Non-residents' share among OFZ bond holders declineshttps://tmsnrt.rs/3ck81Mt

Russia's share of JPMorgan's GBI-EM index https://tmsnrt.rs/3wg8gQD

(Reporting by Katya Golubkova in Moscow and Marc Jones in London; editing by Larry King Editing by)

((ekaterina.golubkova@thomsonreuters.com; +7 495 775 1242;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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