Page 12 - RUSRptSept18

The latest bill submitted to the Senate would expand sanctions to include government bonds, but it is not clear if these provisions will be adopted as Russian government bonds (OFZ) are widely held by US investors and pension funds.
If the bill is adopted then it will mainly affect new debt. So long as sovereign debt is subject to the same restrictions as debt of most sanctioned banks and firms, transactions in debt issued before the new sanctions shouldn’t be affected.
There are two channels through which this could have an impact on Russia’s economy and markets.
First the government would face lower demand for newly-issued debt. It is likely to issue RUB2.4 trillion rubles (2.2% of GDP) of bonds in 2019 to finance the budget deficit and to roll over maturing debt. But the sanctions wont affect the government ability to raise money as most of the debt will be bought by local banks and is in rubles.
However, the sanctions could still push up yields by about 50-100bp on new bonds over existing bonds. In 2014 the Crimea sanctions were issued and there was some uncertainty about whether sovereign debt issued post-sanctions could be traded, resulting in a premium on new bonds. When Euroclear confirmed in 2016 that sovereign debt issued after the sanctions imposed in 2014 could be traded, the spread of newly-issued debt over outstanding debt narrowed by about 50bp. This time, there would be certainty that new government debt could not be traded, so the additional premium on newly-issued bonds would probably be higher.
The second channel is will be a general spike in investor risk aversion and foreigners will sell holdings of outstanding government debt, currently worth about $50bn, or 2.8% of GDP.
Spreads on dollar debt widened by 100bp when sanctions were imposed in 2014 and then each time they were tightened.
2.5 The case of the missing $46bn of Russia’s T Bill holding
Russia caused a stir in the international bond markets by apparently dumping 84% of its holdings in US treasury bills, or $81bn worth of bonds , bringing its holding in the world’s favourite gross international reserves (GIR) instrument down to a mere $14.9bn.
It was believed that Russia was pre-emptively trying to put a large part of its reserves – nearly a quarter of all Russia’s hard currency reserves – out of the reach of US regulators that are threatening to ban transactions with Russian bonds in the next month with the Defending American Security Against Kremlin Aggression Act ( DASKAA ) bill that is due to be read when Congress returns from its summer break.
The sell off also wounds the US government’s ability to raise debt to fund it large deficits – but not very much. The price of the bonds ticked up on the news, but not by very much. At $96bn in March, Russia’s holdings of T bills are large, but not that large: with $1.1 trillion, China holds the most T bills and could do real damage to the US if it were to unwind its position.
However, it transpires the Central Bank of Russia (CBR) didn't sell all its bonds, but simply moved the ownership of part of the holding to offshore domiciles. A blog by Benn Steil and Benjamin Della Rocca of the Council of Foreign Relations dug into the numbers and found that some $46bn of the
12 RUSSIA Country Report September 2018 www.intellinews.com