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Talk is cheap, but no longer effective in hindering Russia

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Last week’s chatter in the bond markets about the US applying a new round of sanctions on Russia served to highlight how little investors feel threatened by this kind of talk. Now the US has to take action to affect Russia.

In the past, the mere whisper of a new round of sanctions being slapped on Russia would be enough to send Russian spreads soaring and close down issuers’ access to the bond markets. That was a tool that US and Europe could use to good effect on the sly — talk was enough to hamper Russia’s fundraising activities without the West having to do anything and a denial of such intentions was enough to quickly remove pressure.

But last week, as talk of fresh Russian sanctions ramped up, OFZs rallied and Russian issuers ploughed on ahead with their plans to tap the capital markets undeterred, with RusHydro, Credit Bank of Moscow and Domodedovo Airport all announcing bonds.

This was all despite the Central Bank of Russia’s estimates calculating that in a worst case scenario, Russian yields could rise by around 400bp.

It was clear that just talk of sanctions is no longer enough — in large part because so many unfounded rumours have come and gone, but also because Russia has proven financially resilient, both in terms of domestic demand for assets and it having attracted significant Asian interest in recent years.

The USA’s clout is waning. Some analysts argue that the limited sanctions currently in place on Russia have had a minimal effect on the country, compared to oil price fluctuations.

After the US Treasury saying on Friday that Russia’s bond market is too important to global financial stability to sanction sovereign bonds under Directive 1 — a situation whereby US nationals would not be allowed to hold or buy sanctioned instruments — this effect will be compounded.

Rumour without substance will not be enough to move Russia’s bond markets anymore. If the US wants to hurt Russia, it will have to strike, rather than just let the markets talk about the possibility of it doing so.

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