Biden’s New Russia Sanctions – A Bid for Stable Relations?

By Bob Savic, Advisor to Dezan Shira & Associates 

On 15 April 2021, the White House announced new sets of financial sanctions on Russia.  This time the sanctions will have significant bite, targeting the country’s primary issuances of domestic Rouble-denominated government bonds. The sanctions come into effect on 14 June 2021 by an executive order set out by US President Joe Biden. Previously, in 2019, The Trump administration set out sanctions prohibiting US financial institutions from purchasing primary issues of non-Rouble domestic debt.

Other wide-ranging sanctions have also been announced on over 30 Russian corporations and individuals on various issues ranging from last year’s alleged US election interference to other malign activities including accusations of bullying the Ukraine government.

But the most significant new twist in the entire sanctions’ saga will be the new penalties on Russia’s government debt for their SolarWinds cyberattack. The relief, it can be described as such, is that the new sanctions won’t apply to trading in Russia’s secondary bond market.  Yet, the possibility this would not be extended into this area of the capital markets cannot be ruled out.

As a result, investors began to sell off Russian government bonds yesterday.  Altogether, the market capitalisation for the Russian government’s Rouble-denominated debt is around US$180 billion.  About one-third to a quarter is held by foreign buyers, and half of them American institutional investors.

For years, the US treasury considered the possibilities of sanctions on Russian government bonds, but unlike the post-Crimea annexation where the US authorities targeted long-term Russian corporate debt, the idea of sanctioning government debt was often rejected because of concerns such actions could prove to have negative global spillovers on global debt securities generally. This time around, the Biden administration is likely bargaining that last year’s US$10 trillion monetary stimulus, by the central banks of advanced economies, would be sufficient to calm any wobbles in the global financial markets by printing even more money to purchase international bonds. A kind of Modern Monetary Theory extended to US financial sanctions!

European governments have quickly voiced support for these sanctions.  But they are likely to be extremely nervous about this new development; fearing it could not only destabilise Russia’s fragile economy but have negative consequences also for Europe’s own Covid-19 battered economy where Russia is its third largest trade partner and one of its largest overseas FDI destinations.

For now, the European Union has refrained from imposing similar financial sanctions on Russia’s government debt and the US sanctions do not extend to non-US financial institutions.  This contrasts with their various other commercial sanctions, including those targeting the supply of high-grade US-developed technology to various select various Chinese companies.

In the context of international relations, President Biden’s offer of a personal meeting with Russian President Putin and his recently announced offer of ‘normalised and stable relations’ with Russia, must therefore all be viewed with some degree of scepticism.  These can only be described conciliatory gestures, perhaps designed more to reassure a nervous European audience, than as a genuine conciliation to Russia. By any diplomatic measure, how can one country genuinely desire normal and stable relations with another, as it looks to undermine the bedrock of its financial system and government solvency?

This isn’t the only issue of concern to observers and investors in China’s cross border Belt & Road Initiative. The current conflict raging in the Donbass region of Southeast Ukraine in response to which the Russian military has reportedly amassed a substantial presence around Ukraine’s eastern and southern borders must surely be another source of major concern. Any escalation of this conflict in leading to a regional involving Russia and Ukraine, and possibly involving the US and European powers may the straw that finally breaks the camel’s back.  It could well put an end to ambitions for BRI’s expansion across Europe, through Russia.

Interestingly, normally vociferous French President Emmanuel Macron has been conspicuous by his silence over the escalation of violence in Ukraine and Russia’s responses to it. This contrasts with a seemingly anxious German Chancellor Angela Merkel, and her backing of the Nordstream-2 project which has also been subjected to US commercial sanctions, given that Merkel was first European leader to discuss the growing tensions in Ukraine, by phone, with Russian President Putin.

It’s more than likely that both these leaders are highly concerned about a collapse of the Minsk Accords, brokered between the West and Russia, in the wake of the 2014 Crimean annexation by Russia, which President Putin highlighted in each of his recent telephone conversations with US and European leaders.  After all, it was Merkel and Hollande, as Germany’s and France’s leaders at the time, who brokered the Accords with Putin and Ukraine’s then-President Poroshenko, following on from which, they were presented as a fait accomplis of the European position regarding Russia’s actions, to the Obama and Biden Whitehouse, in 2015.

Notably, although perhaps a minor side point, but the then-British Prime Minister, David Cameron, was not invited, by the German and French leaders, to attend the negotiations. Perhaps, though, it’s also a reflection of the great divide between the Western powers and their relations with Russia, one which President Biden may be looking to finally test to its most extreme outcome?

Still, taking the conflict in SE Ukraine aside, it is the coming sanctions on Russia’s government debt which must be the greater worry for Russia’s capital markets, its ongoing economic stability, the knock-on effects to Europe’s trade dependent economy, and the broader prospects for BRI expansion across Russia into Europe. One can only hope that sense prevails and the destructive forces at play are soon curtailed, hopefully with a historic new detente being prospectively agreed in admirably neutral, Finland. Certainly, there is much at stake economically, financially, and politically, and for any BRI observers, let alone those invested in this global initiative, the coming weeks and months may become the dawn of a new epoch for inter-government cooperation or the end of a time-worn and frayed era of globalisation.

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