The markets have ended up more or less flat after the sanctions actions on April 15. I guess the perception is they could have been much worse. I was not surprised that sanctions on rouble debt were included, but was surprised that no major oligarchs – the friends and facilitators of Putin were included. Maybe the US thought that sanctioning sovereign debt was a big enough move to keep sanctioning in reserve.
See FT piece below, I tend to share the view of Richard House, ultimately its direction of travel that matters. And it’s the future signaling which is really important.
https://www.ft.com/content/
I think it’s a bit naive to think that US investors unable to buy in the primary market will all simply mop up bonds in secondary. Compliance departments will now be working overtime to figure out what is legal and prudent from an environmental, social, and governance perspective and reputational damage perspective. I would not read too much into what investors say on the record to the media – this is inevitably driven by the positions, which they are trying to talk up, they cannot help themselves.
But without a doubt, this action will stop some more investors, at the margin, from investing in Russia. It will increase Russia’s borrowing costs, curb investment and growth thereby imposing further constraints on Putin. It’s more of the gradual tightening of the economic noose around Vladimir Putin.
As I noted on April 15 key questions for me are:
What next? What’s the direction of travel in US-Russia relations? And what’s the next run on the sanctions ladder? Secondary sanctions?
How do index providers respond?
Are new ruble issues included in indices in which case even US investors will be pushed to buy Russian debt in secondary?
What’s US Office of Foreign Assets Control guidance?
Will they signal to US investors either explicitly or implicitly that this is a signal that US investors should not participate in buying Russian debt – primary or secondary?
Thus far the explicit guidance in the FAQs from OFAC is they can trade secondary.
But perhaps by signaling that secondary sanctions are not that far away and that any investor subsequently stuck in their positions because of this were prior warned – it’s their own risk. They might even decide to move more directly to sanction both secondary and primary ruble issuance after this June 14 cut-off date for new issuance – mindful of market reaction so far.
This might also reflect feedback from this sanction iteration and perhaps further malign Russian action. Actually, it makes more sense now I think to give further guidance before then – before US investors take positions in secondary trading in post-June 14 new primary issuance. We might still see that – remember there is still the CBW deadline looming in early June on the 90-day response window to the US certification.
Again it affirms I guess that when it comes to sanctions, the US has plenty of gears.
The ultimate question: Is this move enough to deter Putin? It feels on the mild side for sure. Has the US got the right balance here between “carrot” and the summit offer and “stick” and the sanction on ruble primary sovereign debt to deter Putin from further malign actions?
Time will tell. The ongoing actions in the Sea of Azov suggest, perhaps not.
