​Sovereign Debt: New Sanctions will cover secondary market, but only for newly issued paper

RUSSIA ECONOMICS - In Brief 23 Feb 2022 by Alexander Kudrin

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Western countries continue to introduce new sanctions after the decision of Russian authorities to recognize the independence of the breakaway Donetsk and Luhansk republics. Yesterday and today both US and EU authorities announced a new portion of restrictions regarding sovereign debt. To remind, American investors have been prohibited from participation in primary Eurobond placements by the Russian Finance Ministry since August 2019. The latter effectively closed the door for the issuance of such paper denominated in USD. Besides that, US investors have not been allowed to participate in the primary OFZ market since June 2021. However, in both cases operations on the secondary market were allowed. Now the US and EU are prohibiting investors to deal with Russian Sovereigns (issued after March 1, 2022) on both the primary and secondary side. At the same time, foreigners are still allowed to own and trade “old” paper, and there is no requirement to terminate the existing positions in these bonds. To remind, their share in Sovereign Eurobonds is close to 50%, while in OFZ it dropped last year to about 20%.From a fundamental point of view, the contraction of demand for Russian debt on the primary side is not a critical problem as the budget is running a significant surplus and the borrowing program can be easily cut. The Finance Ministry has already announced that it will be issuing paper after February 22 with new ISINs (avoiding a tap of existing issues) to provide a straightforward distinction between “old” and “new” series. All other things being equal, two yield curves are to appear on the secondary market. The “new” paper which can be owned only by locals, is likely ...