If Trump signs sanctions against Russian debt, Russia is doomed

The USA is not likely to approve the law to ban the purchase of the Russian debt, Nordea Bank analyst Gregory Zhernov believes. According to him, the Americans make good money on Russian federal bonds (known for the Russian initials as OFZ - federal loan bonds).

New sanctions against Russian debt may break Russian economy. 63659.jpeg

The House of Representatives supported the initiative to include a ban on operations with the Russian national debt in the draft defence budget for 2020.  The amendment provides for a mechanism to lift these sanctions. If the US administration concludes that Russia did not intervene in the American elections at least during one election cycle, and if Congress agrees with this conclusion, the sanctions will be lifted. The draft defense budget has not been approved yet. US President Donald Trump will need to sign it after the document is approved by the House of Representatives and the Senate.

Nordea Bank analyst Grigory Zhernov told Pravda.Ru that the Americans have repeatedly voiced such initiatives before. However, the implementation of such a scenario does not seem likely to follow. "This is the reason why we see no reaction from the Russian ruble to this news. The Russian CDS have shown no reaction either - they stay at their lows since the summer of last year after the sanctions rhetoric against Russia was toughened dramatically," said Grigory Zhernov.

Nevertheless, attempts to increase the pressure of sanctions on Russia will continue as the US presidential election in November 2020 approaches. In the long run, it will limit the potential for the Russian ruble to strengthen.

According to Grigory Zhernov, the demand for Russian bonds on the part of non-residents, including the Americans, has been very high during the recent months. "The high demand for OFZ (federal loan bonds) was one of the drivers for the Russian ruble. The ruble looks quite attractive. Given the fact that we expect a rate cut from the Bank of Russia, everyone, including Americans, want to make money on it," said the expert.

At the same time, in the event the USA passes the law banning all operations with the Russian debt, the ruble may collapse yet again. The Americans will be forced to sell off Russian assets. Yet, such a development is not going to strike a serious blow on the Russian economy either because of the  
large budget surplus and the growth of Russia's reserves, the analyst added.

"To crown it all, Russia has a very low national debt. In other words, Russia does not need to resort to refinancing methods to pay it off. From this point of view, Russia's solvency will not be affected.