UPDATE 1-Russia expects short-lived volatility if U.S. sanctions govt debt

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MOSCOW, Nov 28 (Reuters) - The Russian bond market may see a short-lived period of volatility if Washington imposes sanctions on Russian treasury bonds, Ksenia Yudayeva, first deputy governor at the Russian central bank, said on Tuesday.

The United States is considering expanding sanctions against Russia and may impose restrictions on buying Russian treasury bonds, known as OFZs, that are popular among international investors thanks to their high yields.

“In the long term the situation would always stabilise. In the short term, some volatility is possible,” Yudayeva said, presenting the central bank’s regular report on risks to financial stability.

The Russian central bank has looked into various scenarios regarding the possibility of the United States extending its sanctions list to include Russian treasury bonds, she told reporters.

The central bank had previously played down a fallout of wider sanctions, saying it has tools to address possible market shocks.

“I repeat, we have various tools,” said Yudayeva when asked if the central bank itself is considering buying into OFZ bonds issued by the finance ministry.

Yudayeva also said foreign demand for Russian treasury bonds has been on the decline amid intensified “sanctions rhetoric” from the middle of September.

Despite recently waning demand, the share of Russian treasury bonds held by foreign investors reached an all-time high of 33.2 percent at the beginning of October.

Considering a safeguard in case of an expansion of U.S. sanctions on Russian bonds, which Moscow needs to cover budget shortfalls, the Russian finance ministry is looking for possible buyers in the East.

This week, the finance ministry will hold a non-deal roadshow in Hong Kong on Thursday as it considers borrowing in yuan on the Russian market, IFR, a Thomson Reuters news and market analysis service, reported on Monday. (Reporting by Elena Fabrichnaya; Writing by Andrey Ostroukh; Editing by)