Business Maverick

Business Maverick

US Treasury Prohibits Investors From Buying Russian Debt

Pedestrians walk by Saint Basil's Cathedral on Red Square in Moscow, Russia, on Sunday, 2 May 2021.

The US Treasury stepped up financial sanctions on Russia by restricting investors from buying the country’s debt in the secondary market, bringing trading activity almost to a halt on Tuesday as investors scrambled to understand the new restrictions.

The updated guidance means US firms can hold or sell Russian debt, but can’t buy it, according to a spokesperson for Treasury’s Office of Foreign Assets Control. The rules applies to both corporate and sovereign debt as well as equities.

Banks trading Russian corporate and sovereign bonds have already faced criticism in the US. Senator Elizabeth Warren has blasted them for undermining sanctions, and called out market makers JPMorgan Chase & Co. and Goldman Sachs Group Inc. for purchasing and making recommendations to clients.

Both are being are being pressed to hand over extensive information on clients trading Russian debt.

The new measures will come as a further blow to funds holding Russian bonds, as they reduce the number of potential buyers of the assets and undermine any remaining value. The update, which was issued on OFAC’s website late on Monday, caught investors by surprise on Tuesday, prompting many to contact lawyers to determine what the new rules entail, according to people familiar with the matter.

Russia’s bonds fell around 3 cents on the dollar on Tuesday as banks and brokers marked down their holdings.

“Markets usually evaporate almost immediately but it’s always good policy to allow wind down for at least some time,” said Brian O’Toole, a former senior adviser at OFAC. “Probably no one will buy the debt but it’s still good policy to let folks offload if they can rather than sticking them immediately with a worthless asset.”

According to OFAC’s update, US market participants are prohibited from purchasing both new and existing debt and equity securities issued by a Russian Federation entity. But investors can still sell such assets, or facilitate their sale, to non-U.S residents and may continue to hold them.

The change to the rules comes as Russia tries to avoid a sovereign default by finding a way around sanctions that are preventing it getting money to bond investors. The US Treasury barred US banks and individuals from accepting bond payments from Russia’s government last month. Russia is now in a 30-day grace period on bond payments that were due May 27.

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