When Russia invaded Ukraine on February 24, the immediate response from the US, the UK, the European Union, and other allies, was to enact economic sanctions swiftly and forcibly. As the war progressed these sanctions were strengthened, and the country was all but cut off from participation in the global financial system.
Part of this action was to limit the trading of Russian bonds to limit abilities of the country’s issuers to raise funds. As soon as the war broke out, bans were put in place in Europe, the UK and Canada to ensure access to Moscow’s debt was restricted. The measures matched existing bans on newly issued corporate and sovereign debt already in place in the US since April 2021.
Moscow quickly moved to shut down its bourse to curb the damage. The ban was lifted for local investors a few weeks later, but international access remained closed until earlier this month when Russia opened the markets to a handful of ‘non-hostile’ countries — anyone who had not imposed sanctions — meaning trading resumed and prices rose.
In June, the US Treasury further strengthened the country’s stance and blocked investors from any purchase of Russian debt on the secondary markets while allowing investors to dispose of the assets or hold on to them. Certain vulture investors had been snapping up Russian debt on the cheap in the hope it would recover if the war were to end. This decision moved to prevent capital inflows.
The US Treasury introduced further, clearer guidelines allowing its banks to unwind toxic assets in July, permitting a three-month window within which to do so. In short succession JP Morgan, Bank of America, Citigroup, Deutsche Bank, Barclays and Jefferies all entered the fray, albeit cautiously.
Wall Street was back on the market.
There are several trains of thought here. First, a strong argument that using sanctions to put Russia into default and destroy its bond market was a pointless gesture in the first place that ultimately only harmed western investors that were unable to recover their money or sell at a price close to what they paid.
So one could argue that the latest move from Treasury is a good way to protect these investors, such as pensioners whose money is tied up in funds that bought Russian bonds, offering them a chance to liquidate their positions. After all, buying and selling bonds in the secondary market does not fund Russia — it is the sanctions on buying Russian bonds in the primary markets that will starve them of cash.
But it could also be argued that this move sets a dangerous precedent. Temporarily introduced exceptions often have a habit of being extended or becoming permanent. In Europe, a similar move was made. Russian bonds prices rose on the news.
As clear as it is that it is restrictions on primary markets that prevent cash flow, for Russia to have a fully functioning secondary market that the US participates in undermines the very nature of economic sanctions. Wall Street should be careful to not outstay its welcome, dispose of the assets and then quickly remove itself from the market. Extensive trading of bonds will set an undesirable precedent.
In a final twist that may continue to worsen things, the Moscow Exchange this week announced its intention to issue so-called ‘replacement bonds’ that exactly mirror the terms of existing Eurobonds Russian companies are unable to service.
In what is a clear evasion of sanctions and an attempt to move back to how things were pre-invasion, the West should take heed of the slow unravelling of the economic combat it so heavily relies on. Too many loopholes in tandem and Russia’s economy will no longer be under pressure. Without pressure, it can continue its attack on Ukraine unchecked — this should not be encouraged.