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The covert European sanctions against Russia have been expanded

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The covert European sanctions against Russia have been expanded

The covert European sanctions against Russia have been expanded
July 08
14:00 2016

Western states have expanded the covert sanctions, which overlap the possibility of financing the public and private companies of the Russian Federation. On Friday it became known that the Euroclear, the main organization in Europe, which does the work with government bonds, hadn’t begun the work with the new issue of ten-year federal loan bonds (OFZ, “Russia 26”) that amounted to 20 billion rubles and which was placed on 6 July.

According to the chief economist at ING Bank in Russia and the CIS Dmitry Polevoy, the issue was supposed to appear in the system of the Euroclear on 8 July but it did not happen. “We contacted the office of the Euroclear in Belgium to check it out and a representative confirmed that the issue had not been approved and the decision had not been accepted yet. He also did not give any information when the system would accept the new OFZ. No specific reason for the delay of the solution was given by the representative, “- said Mr. Polevoy in the latest analytical report, received by the Forbes editorial office.

The problem with the bonds issue is a new blow to the financing of the budget deficit of the Russian Federation, because it can cut off large foreign funds and banks from OFZ. A similar situation took place in May. Then the Euroclear refused to participate in the work with Eurobonds of the Ministry of Finance of the Russian Federation. This almost halved the volume of issues production -from $ 3 billion to $ 1.75 billion. Mr. Polevoy states that if the new OFZ issue does not receive the approval of the Euroclear system, it can be regarded as an extension of the “gray zone” of the covert sanctions against Russia. He notes that there are no formal restrictions on operations with OFZ and Russian Eurobonds in the EU and the USA.

This position of the Euroclear against OFZ, if it is not changed, will obviously make the problem for the Russian budget. It hasn’t got enough financial investments.  The new issues of debt securities were seen as one of the government’s hopes. Starting with the next year, the Russian authorities were going to increase ruble loans – from 300 billion rubles in the current year to 1.29 trillion rubles in 2017 and 3 trillion rubles in 2018-2019.

” For the Ministry of Finance the way out of this may become the additional placement of old OFZ, although such a policy will be enough not for more than a couple of years”, – said Mr. Polevoy. According to the Central Bank data, as of 1 April the foreigners owned OFZ that amounted to 1.145 trillion rubles, or 22.2% of all securities in circulation.

Probably, this situation became an unpleasant surprise for the Ministry of Finance. Earlier, Deputy Finance Minister Sergei Storchak said that he predicted the successful implementation of the OFZ program in the second quarter and expected that the placement program would be fully executed.

Vladimir Tsuprov, the managing director for ”BNP Paribas Investment Partners” said that difficulties with the OFZ service reception in the Euroclear was the main topic for discussion of the major financial market participants, because they could significantly affect the public debt market. Thus, the spreads between different OFZ issues would be swapped and, likely, it would be more expensive to borrow for the Ministry of Finance.

The Ministry of Finance of the Russian Federation and the Euroclear didn’t comment the situation.

“The ban on the work with the new Russian issues in the short term can significantly hinder the access of foreign investors to the Russian debt securities. The high demand for the sovereign issues of Russia from foreign investors, probably, will help find the ways to purchase securities bypassing the Euroclear. But this will pose a number of inconveniences and additional costs, which can temporarily cool a tendency to a rapid reduction in the OFZ profitability “- said Alexander Prosviryakov, a member of the ACI Russia and the Russian Corporate Treasurers association.

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