Russia:A growing drumbeat on Capitol Hill for further sanctions against Russia because of its interference in U.S. elections has hit Russian bond markets and the foreigners who trade in them.
Since U.S. legislators ramped up efforts at the start of August to pass laws that would penalize Russian financial and energy industries, Russian ruble-denominated bond prices have dropped about 7%, according to IHS Markit .
Prices are likely to fall further as Congress moves forward legislation that would prohibit U.S. investors from buying newly issued Russian government bonds, emerging-market bond fund managers said. Such selloffs also hit Russian banks and institutional investors, which are heavy buyers of their government’s debt.
The decline is an unusual example of U.S. policy impacting securities of foreign governments, putting Russia in the realm of countries like Venezuela and Iran. It has also rocked emerging-markets investors already reeling from heavy losses in Argentina and Turkey, because Russia comprises about 8% of the most widely followed emerging-markets index for local-currency bonds.
Rising interest rates and the strengthening U.S. dollar have sparked stock and bond routs in 2018 in emerging-market countries like Argentina and Turkey with trade imbalances and fiscal deficits. The selling spread in recent weeks to stronger economies like Indonesia. Losses year-to-date on a widely traded emerging-markets bonds exchange-traded fund are now about 6.28%, according to data from Morningstar.
Russia had stood out as one of the more stable economies in the developing world this year, bolstered by its low debt — 17.4% of gross domestic product, according to S&P Global Ratings – and prudent fiscal policies. Political risk has increasingly overshadowed that economic strength as the U.S. government moves to pinch Russia’s finances.
“Investors have had years to reduce exposures in Russia,” Daleep Singh, a former U.S. Treasury Department official, said at a hearing before the Senate Banking Committee Wednesday about one of the new sanctions bills. “I can think of no credible argument why U.S. public pension funds and saving vehicles should indirectly fund the Russian government while the latter continues to sponsor violations of U.S. sovereignty.”
The proposed laws wouldn’t prevent U.S. firms from owning any of Russia’s existing debt but many are selling out all the same, preferring to avoid the political noise engulfing the bonds and potential compliance work involved in owning them, the fund managers said.
