Russia Says Its Debt Markets Can Withstand Shock of Sanctions

(Bloomberg) -- Russia’s borrowing costs will only suffer a short-term spike if the U.S. goes ahead with a proposal to impose sanctions on the country’s sovereign debt, according to central bank Governor Elvira Nabiullina.

After the initial shock, yields on ruble government bonds, or OFZs, will stabilize around 30 basis points to 40 basis points higher, Nabiullina said in a speech on Thursday in Russia’s parliament. Foreign investors, who currently hold 33 percent of the debt, will be replaced with local buyers, she said.

“In our opinion, there won’t be an any seriously negative consequences,” Nabiullina told lawmakers. “Although the share of foreigners in the OFZ market is significant, it is limited, and there is always demand for very liquid assets from our banking sector.”

The central bank is preparing for the worst ahead of a report by the U.S. Treasury, due next quarter, on the possible effect of sanctioning Russian sovereign debt as punishment for the Kremlin’s alleged U.S. election meddling. While the Finance Ministry largely relies on debt to cover the budget shortfall, officials have brushed off worries about the impact of fresh penalties.

Yields on Russian government bonds maturing in 10 years have jumped 20 basis points since mid-October to 7.7 percent, partly as a result of the sanctions threat. That’s still more than half their yield in 2015 amid an oil-market crash and after the U.S. imposed sanctions that prevented certain companies from issuing debt.

“Our financial sector is more resilient now than it was three years ago to any negative decision that could be taken,” Nabiullina said. “We have tools to counter such shocks.”

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