Russian Bonds Gain as Traders Laugh Off U.S. Sanctions Threat

Updated on
  • SocGen recommends buying ruble debt, citing diminished risk
  • No word on bond report that has hung over Russian markets

Russia’s borrowing costs plunged to the lowest level in more than four years as investors took the lack of detail in a U.S. Treasury report as a sign that Washington isn’t ready for tougher sanctions.

The long-awaited report published late Monday essentially amounted to a list of Russia’s billionaires and officials with no indication of additional penalties. The Treasury gave no details about a separate review of the possible impact of sanctions on Russian sovereign bonds that has been casting a shadow on Russian debt markets since it was commissioned by President Donald Trump in August.

“The U.S. Treasury’s list of prominent Russians is merely that: a list of prominent Russians which anyone with an Internet connection and thirty spare minutes could have produced,” Julian Rimmer, an emerging-markets trader at Investec Bank Plc in London, said by email. “There’s an element of relief because no punitive sanctions were imposed."

The accompanying review of the potential effect of sanctions on Russia’s sovereign debt was classified, Senator Bob Corker said in a statement on Tuesday.

Moody’s Investors Service lifted its outlook for Russia to positive from stable on Thursday, raising the prospect for an upgrade out of junk if the sanctions threat is removed. S&P Global Ratings also rates Russia one notch below investment grade and is due to review its assessment next month.

An auction of 30 billion rubles ($534 million) of bonds on Wednesday should see strong demand, according to Javier Sanchez, a fixed-income strategist at UniCredit SpA. “The market has received the sanctions report well,” he said.

Diminished Risk

Societe Generale SA recommended buying Russia’s 10-year OFZ notes, in a report emailed Tuesday. “The current U.S. approach significantly diminishes the risk of harsh measures against Russian sovereign debt over the short-term,” analysts including Phoenix Kalen wrote.

The nation’s ruble notes due in January 2028 climbed, cutting the yield 10 basis points to 7.32 percent, the lowest level since before Russia’s annexation of the Crimean peninsula. Trading volumes were almost 400 percent of the daily three-month average.

The ruble advanced as much as 0.8 percent against the dollar, before paring gains to trade little changed at 6:55 p.m. in Moscow after Treasury Secretary Steven Mnuchin said he expected sanctions would come out of the oligarch report.

High Expectations

While Yandex NV and Aeroflot PJSC retreated after their co-founder and chief executive officer, respectively, were included in the list, Russia’s benchmark stocks gauge closed down 0.2 percent, compared with a slump of 1.7 percent for MSCI Inc.’s emerging-market equities benchmark.

The Treasury said inclusion in the rosters doesn’t mean the individuals will face sanctions or impose any restrictions on dealing with them. In the weeks ahead of the release, Russian tycoons and officials had shown growing concern about the possibility they’d be included. Merely being publicly identified on the list could dissuade banks and other institutions in the U.S. and Europe from doing business with them.

“It’s very unlikely that all persons and businesses from the oligarchs’ list will be sanctioned so it looks like a non-event,” said Dmitri Barinov, a portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, which oversees about $200 billion in assets. “Core themes for the Russian bond markets, such as high yields and oil, will dominate the talk about sanctions from now on.”

— With assistance by Anna Andrianova, Artyom Danielyan, Alec McCabe, and Rita Nazareth

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