On 15 April, the US tightened its sanctions on Russia. The following activities by a US financial institution are prohibited as of 14 June 2021, except to the extent provided by law or unless licensed or otherwise authorised by the US OFAC: (1) participation in the primary market for rouble or non-rouble denominated bonds issued after 14 June 2021 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation; and (2) lending in rouble or non-rouble denominated funds to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
As countermeasures, Russia expelled ten US diplomats, restricted the work of those remaining in Moscow and added US officials to its sanction lists.
The recent US sanctions targeting the issuance of sovereign debt should currently have a limited impact as it targets the primary market (where debt is issued) and not the secondary market. Indeed, Russia’s public finances are very strong with a public debt of about 20% of GDP in 2020. The overall fiscal deficit is forecasted to amount to less than 1% of GDP this year. Hence, the issuance of new sovereign debt should be rather limited this year and might thus be fulfilled by domestic institutions that would afterwards sell the bonds to other institutions in the secondary market. That being said, as long as the sanctions are in place, it implies that the flexibility of the Russian government to issue new sovereign debt on the international capital market would be more limited, which would somehow limit its flexibility.
Moreover, the tightening of the US sanctions is a clear warning that more sanctions might be imposed. This comes in a context of very low relations between Russia and the West. There are many contention points stemming from the conflict in Ukraine where tensions are again dangerously flaring up, cyberattacks (cf. the SolarWinds hack), interference in the recent US elections and the recent arrest of Alexei Navalny. On the positive side, Joe Biden has the intention to try to normalise the relations with Moscow, and has proposed to organise a summit with President Putin.
As long as the risk of a further tightening of sanctions persists, Credendo would maintain its short-term political risk in category 3/7. Given the vast foreign exchange reserves, low short-term external debt and the current account surplus, the classification is largely driven by the risk related to sanctions.
Analyst: Pascaline della Faille - P.dellaFaille@credendo.com