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Russian bond market would survive sanctions, but yields would rise

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MOSCOW — Any tightening of Western sanctions on an already strained Russian domestic bond market would make borrowing more costly for the government and trigger significant short-term volatility, a deputy finance minister said.

But a strong domestic investor base means the market, where a politically motivated selloff sent benchmark ruble yields to six-year highs, would survive the imposition of tighter restrictions, Timur Maksimov told Reuters in an interview, adding that the ministry’s 2022 broadcast plans remain on track.

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Russia has massed around 100,000 troops near the Ukrainian border while denying plans to invade -diplomatic-path-2022-01-27. If so, Western countries have threatened new financial and economic sanctions.

Under existing sanctions, US investors are already banned from buying new OFZ bonds and US banks from buying sovereign Eurobonds directly from Russia.

US officials have raised the possibility of extending the bans to cover secondary market trading of new issues of both instruments.

On Tuesday, the Treasury canceled the OFZ auction for a second straight week as an ongoing selloff drove 10-year yields to their highest level since 2016.

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Bidding will resume once the market “normalizes”, Maksimov said, adding that his current volatility was driven by politics rather than economics, and “such a situation cannot last forever”.

The market would overcome the disruption caused if foreign investors sold all of their OFZs, which equates to just under a fifth of total holdings.

“It (new sanctions) will cause serious volatility in the short term, but it will fundamentally change nothing. Because even if we remove 19% of the portfolio, we still have 80% (held by domestic investors),” Maksimov said.

The Ministry of Finance still plans to raise 3.3 trillion rubles ($41.5 billion) in OFZ bonds this year, reintroducing floating-coupon bonds in addition to its main fixed-coupon OFZs, it said. .

($1 = 79.5984 rubles) (Reporting by Darya Korsunskaya; Writing by Katya Golubkova and John Stonestreet)