Biden’s Russian sanctions on Ukraine send stock and bond markets shaking

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“They don’t have a deficit to fund. They are not desperate for money,” said Elina Ribakova, deputy chief economist at the Institute of International Finance (IIF). “The banking system is very liquid. They have extra money lying around.

The Biden administration’s opening salvo this week drew heavy criticism from some Republicans, who said it fell short of what was needed to deter another Russian dive into Ukraine. , even after the president on Wednesday added additional measures targeting the company behind a controversial Russian gas pipeline. . Still, investors expect Russia’s $1.5 trillion economy — smaller than New York state’s — to suffer mounting damage if the crisis persists.

On Wednesday, a market indicator predicted that Russia’s benchmark 12-month interest rate would hit double digits, which could push the economy into recession, according to IIF data.

Another measure of market jitters – the cost of insuring against a Russian default – doubled in a week. An investor is now expected to spend $431,000 to insure $10 million in Russian government bonds against a failure by Moscow to repay its debt, the highest price in more than seven years.

As the crisis over Russian intentions in Ukraine intensified, the Moscow stock market over the past week has lost more than 20% of its value and fallen 37% from its October peak.

Biden’s latest move, reversing a stance he took last year, also imposed sanctions on Nord Stream 2 AG, the company building an $11 billion pipeline to deliver Russian natural gas to India. Germany. The project is 100% owned by a subsidiary of Russia’s Gazprom, the world’s largest natural gas producer.

The growing financial fallout — including declines in the three major U.S. stock markets on Wednesday — is largely a bet on further Russian military actions and U.S. financial retaliation. The market uproar also reflects the Biden administration’s determination to impose tougher sanctions in response to Wednesday’s Russian decision against Ukraine than the Obama administration did in 2014, when Russian President Vladimir Putin took control of the Crimean peninsula.

At that time, U.S. officials were restricting Russian financial and energy companies’ access to U.S. capital markets and prohibiting Russian oil giants from obtaining the most advanced exploration technologies for use in the Arctic, offshore or shale formations. But the United States, acting with its European allies, has also tried to minimize the impact of financial sanctions on existing trade relations.

Although the sanctions failed to convince Russia to give up Crimea, they have taken their toll. Since 2014, Russia’s economy has grown at an average annualized rate of less than 1%, compared to more than 4% in the previous decade. Even as the United States imposed additional sanctions for alleged Russian interference in the 2016 US election and what it called the “state-sponsored poisoning” of opposition leader Aleksey Navalny, Putin has taken steps to reduce his vulnerability to American pressure.

“He learned a lot from his experience in 2014,” said economist Desmond Lachman of the American Enterprise Institute.

Russia nearly doubled its foreign exchange reserves and increased its Chinese and Japanese holdings at the expense of its dollar and euro assets. Moscow also virtually eliminated its stock of US Treasury securities, selling all but $4 billion of a $97 billion stake it held in 2016.

In what he described as the “first installment” of US sanctions, Biden this week banned US investors from buying Russia’s sovereign debt. But after years of government budget cuts – and with oil prices well above the level needed to balance the public accounts – Moscow has only a limited need to issue the debt that the United States sanctioned on Tuesday. .

JP Morgan Chase analysts said last month that Russia would only need to issue $30 billion in ruble bonds this year.

Foreign fund managers also only own 20% of Russian government bonds. With US – and European – investors barred, Russian officials are likely to rely on domestic banks to buy more government debt. The banks have plenty of resources to do this and are ultimately backed by the Russian central bank and its $630 billion war chest.

Yet new limits on the resale of Russian bonds in the “secondary” market could further erode the global appetite for Moscow’s debt securities.

“It’s kind of a ticking time bomb,” said Andrew Shoyer, a partner at Sidley Austin, which advises companies on sanctions. “It seems disappointing at first. But if other things start to have an impact, it might bite.

Biden’s initial move against Russia’s financial system also targeted two state-owned banks tied to the country’s national security complex, VEB and Promsvyazbank, rather than commercial institutions that serve Russian retail customers.

National development bank VEB finances major infrastructure projects such as railways and petrochemical facilities and is perhaps best known for its role in financing the $50 billion Sochi Olympics in 2014.

The bank’s close ties to the Russian government were illustrated in 2016 when Evgeny Buryakov, a Russian intelligence official who worked undercover at the VEB offices in Manhattan, pleaded guilty in federal court in New York to conspiring as an agent of the Russian Federation. without notifying the Attorney General. He was sentenced to 30 months in federal prison and paid a $10,000 fine, before being deported to Russia in 2017.

Promsvyazbank finances Russia’s defense industry, including providing mortgages to Russian military officers, and operates “under a program to help the government avoid further sanctions”, according to the US Treasury Department.

On Wednesday, Promsvyazbank said it had prepared for the imposition of sanctions and was continuing to operate “as usual”.

To really make the sanctions bite, Biden will have to hammer bigger institutions like Sberbank, which handles more than half of Russia’s salaries and pensions.

“Unless you see a significant increase in sanctions, you won’t see a significant destabilization of the Russian financial system,” said Markus Schneider, senior economist at AllianceBernstein in London. “If the United States decides to do that, it could take very, very powerful action with, of course, a lot of collateral damage in the process.”

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