LONDON (Reuters) - Extended U.S. sanctions on Russia that cause foreign investors to pull out of its bond markets is a potential shock event for 2018 that could trigger big rouble falls, Bank of America Merrill Lynch said in a note.
BAML stressed a scenario extending U.S. sanctions on sovereign debt was unlikely — it called it a “black swan” — and also predicted that should it materialize, Russian authorities would be able to deal with the fallout.
But in the note, it told clients:
“Pressure could be material and will likely depend on the scale of the imposed sanctions. More specifically, an attempt to fully cut off Russia from external capital markets could trigger renewed demand for (hard currency), similar to the spike in such demand in late 2014.”
Curbs imposed in 2014 to punish Russia for its annexation of Ukraine’s Crimea region bar investors from buying new securities from several companies and banks associated with the states. Several individuals are also under sanction.
But the United States is now considering restrictions also on buying rouble-denominated government bonds, known as OFZs.
BAML predicted such a development would send Russian yields 100-150 basis points higher, noting foreigners currently hold almost $37.2 billion worth of OFZs - a third of the market.
Another $14.5 billion of external sovereign debt is held by non-resident investors, it estimates.
External debt issued by Russian companies and banks - currently worth some $450 billion, also is likely to come under pressure if the sovereign comes under sanction, the bank added.
The analysts said the effect would be felt most on the rouble, in a possible repeat of 2014 when the central bank first spent billions defending the currency, raised interest rates sharply and eventually allowed it to float RUB=.
“On the back of repatriation of $37 billion from non-resident OFZ holdings, the rouble might also suffer from likely renewed dollarization among the population,” BAML warned, but did not say how much the rouble could fall.
The analysts were confident however that Russia’s central bank, praised for its handling of the crisis and for prudent monetary policy, can cope with the sanctions fallout.
They expect it to react along the lines of 2014 when it extended a $50 billion repo facility to banks, allowing them to pick up the dollar bonds foreigners were selling.
On OFZ markets, BAML noted local banks had some 2 trillion rubles in deposits with the central bank, money that could be re-allocated to OFZs.
Reporting by Sujata Rao Editing by Jeremy Gaunt