Ukrainian crisis: the banishment of Russian debt from Western markets without much short-term effect

Posted 23 Feb. 2022 at 06:36 PMUpdated Feb 23. 2022 at 19:01

This is perhaps the strongest of the reprisals imposed on Moscow after its incursion into Ukraine: to asphyxiate Russia financially, or, in any case, to deprive it of foreign resources for a long time. “We are putting in place sanctions on Russian sovereign debt. The government can no longer raise money in the West, nor can it swap its debt in Europe anymore,” US President Joe Biden said on Tuesday evening.

For the first time, in fact, the decision was taken and announced simultaneously, by the European Union, the United Kingdom and the United States. Other major global financial centers, including Japan, have followed suit. Quite a symbol.

VIDEO. Ukraine: the West adopts a series of sanctions against Russia

Prohibition to issue

From this Thursday in Europe, and from 1er March in the United States, Moscow will no longer be able to issue new bonds, regardless of the currency used. Since 2019, Washington had already banned bond issues in dollars, then, last April, those made by Russia in foreign currencies on American territory. But nothing prevented the Russian Central Bank from going to finance itself in euros on the Old Continent. It is now impossible.

Another novelty, on both sides of the Atlantic, is the new debt issued after 1er mars will no longer be able to be traded on western secondary markets. The objective is to prevent a bond created in Moscow from ending up in the portfolios of Western managers. A ban that would deprive a large part of their liquidity of future Russian loans.


Concretely, these measures should initially rely on potential Western buyers of debt. The United States has modified the blacklist of Ofac, the formidable service of the American Treasury which monitors the application of sanctions. This lists in particular the prohibited investment securities under penalty of heavy fines, or even imprisonment in the most serious cases.

On the markets, these announcements increased the nervousness around the Russian debt a little more. The yield on government bonds has thus jumped by more than 120 basis points (bps) in one week, accelerating in the last two days to reach 10.81%. A palpable concern also at the level of credit default swaps (CDS), derivative products functioning as insurance that protects creditors from default by the borrower.

“The price of 5-year CDS on Russian debt jumped in a few days from 200 bp to 370 bp, testifies Nicolas Forest at Candriam. This is a significant movement, but we are still far from the 630bp recorded in 2014, when sanctions were imposed after the annexation of Crimea. »

Few immediate effects

It is that the danger is not for all that imminent. “Its surpluses, both budgetary and in the trade balance, reduce Russia’s needs in terms of external financing, particularly with the current levels of oil prices”, underlines JP Morgan. In addition, Russian debt should not come out of the major international indices, which protects existing bonds.

And if necessary, Russia could find financial support from China. A hit for nothing? “In the short term, it is unlikely that the sanctions will have a major impact on the Russian economy,” warns Clay Lowery, of the International Finance Institute. “But in the longer term, and combined with other actions by European countries, they are likely to hamper Russia’s growth. »

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