OFZ market is sanctioned by the US, albeit moderately

RUSSIA ECONOMICS - In Brief 15 Apr 2021 by Alexander Kudrin

Today, US President Mr. Biden signed an executive order, which imposes new sanctions against Russia. According to the document US financial institutions from “participation in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021” by Minfin, CBR, or National Wealth Fund. Besides that, the US financial institutions are not allowed to provide loans to these entities. Simultaneously, OFAC issued clarification according to which the participation in the secondary trading is permitted. Nevertheless, to minimize the risks to the current OFZ international holders, the Russian Finance Ministry decided not to tap existing issues after June 14. Effectively it means that the market will be divided into two parts: placed before and after this date. This step seems to be excessive, which will lead (at least initially) to the formation of additional premium for “new” papers.Ban for participation in OFZs primary placements was orchestrated in line with similar restrictions, which were implemented in 2019 to Sovereign Eurobonds. The latter removed the opportunity for the Government to place papers nominated in USD but left this option for the instruments in other currencies. Russia placed Sovereigns in EUR in 2020, and these Eurobonds are traded without any additional premium to “old” papers.Currently, the major part of US investors is not participating directly in primary placements of OFZs. The bulk of primary dealers are Russian financial institutions. Of course, there are several local branches of the US banks, but the main flow from the US investors into OFZs is executed through the secondary market, which remains unaffected so far. However, the n...

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