U.S. Could Move to Sanction Russia Derivatives, Short-Term Funds

The U.S. might move to limit derivatives trading and short-term loans with Russian companies if sanctions already imposed fail to sway President Vladimir Putin to end support for rebels in eastern Ukraine.

U.S. citizens and businesses are still permitted to trade in outstanding debt of any maturity and new short-term debt and derivatives with sanctioned Russian companies. Restrictions on money-market financing and derivatives could be imposed if tougher penalties are necessary, said a Treasury Department official who asked not to be named because further options are still being discussed.

The U.S. has carefully calibrated a ban on certain transactions with Russian companies including VTB Group, OAO Novatek, OAO Rosneft and OAO Gazprombank, to squeeze Putin while avoiding collateral economic disruptions in Europe and the U.S. That approach leaves room to intensify the sanctions regime, the Treasury official said in an interview with Bloomberg News yesterday.

Putin so far has shown no sign of bending to economic pressure from the European Union and the U.S., even as U.S. officials say they can measure the short- and long-term damage to the Russian economy in bond and equity markets, a lack of access to debt for sanctioned and non-sanctioned companies and the Russian central bank’s decision to increase interest rates.

The challenge for U.S. and European officials is that preventing the defeat of his proxies in Ukraine may have greater urgency for Putin than cooling the slow burn of sanctions that started in response to his incursion into Crimea in March.

Sanctions List

After the U.S. and EU acted in tandem this week, the EU added individuals to its economic blacklist yesterday. U.S. Senate Democratic aide said yesterday that lawmakers are trying to reach an agreement to expedite a confirmation vote for John Tefft, President Barack Obama’s nominee to become the next U.S. ambassador to Russia.

Debt-financing is one of the leading indicators that the Obama administration is watching as it gauges the impact of economic penalties on Russia, the official said.

U.S. restrictions announced two days ago apply to new debt that matures in longer than 90 days as well as newly issued equity from the companies on the list.

In a sign that investors have already cut back, Russian companies have sold just $4.1 billion of bonds abroad since mid-March, less than a fifth of issuance in the same period last year, data compiled by Bloomberg show.

Growth Stalling

Russia’s $2 trillion economy has nearly stalled, foreign capital is continuing to flow out, the currency is weakening and inflation is picking up, making the impact of Western sanctions noticeable for Russian citizens, according to the Treasury official.

He pointed to the central bank boosting interest rates and selling reserves to prop up the currency, and Russian bond yields rising while other countries in the region, such as Turkey and Poland, benefit from declining borrowing costs.

In order to minimize the spillover effects and harm outside of Russia, the U.S. has been careful to allow for the existing contracts to be honored, the official also said.

Russia’s government bonds are heading toward their worst monthly loss since May 2009, while the ruble declined 4.6 percent so far in July, the steepest monthly loss since January and the worst decline in the period among 24 emerging-market peers tracked by Bloomberg.

Estimated net capital outflows in the second quarter were $25.8 billion, almost five times more than in the comparable period of 2013, the Russia’s central bank said. In the first quarter, $48.8 billion exited the country.

Central bank Chairman Elvira Nabiullina has raised rates by 250 basis points since February while consumer prices grew 7.8 percent from a year earlier in June, the most since August 2011.

“We’ve already seen a significant impact on the Russian economy” from previous sanctions, White House spokesman Eric Schultz told reporters aboard Air Force One yesterday. “We are going to let the announcements” on July 29 “sink in and see if they have an impact.”

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