Biden’s administration on Thursday prevented American banks from buying newly issued Russian government bonds, signaling the use of a key weapon in Washington’s intensified conflict with Moscow and threatening Russia’s access to international finance.
The debt limit was part of new measures against Russia, primarily including sanctions against dozens of companies and individuals, as well as the expulsion of 10 diplomats from the Russian embassy in Washington. The moves are aimed at taking advantage of the weak Russian economy to pressure Moscow to ease its campaign to disrupt US political life and threaten Ukraine. The restrictions on debt purchases that apply to bonds issued by the Russian government after June 14 could increase the cost of borrowing in the Russian economy and limit investment and economic growth.
This threat remains tiny for the time being. According to the Russian Central Bank, Russian public debt held outside the country is around $ 41 billion – a relative amount in the world economy. By comparison, the US Treasury Department spent a total of US $ 274 billion in national debt in the first three months of this year alone.
The Russian government sells most of its debt domestically and finances much of its operations by selling energy. According to Oxford Economics in London, American investors hold only 7 percent of Russia’s ruble-denominated national debt.
As a symbolic step, experts say, the measures outlined by the Biden government signal its willingness to take a step-by-step approach that could lead to tougher measures, such as tightening Russia’s access to capital markets if Moscow does not moderate its activities.
“This step may not and should not be considered the final step in the process,” said Adnan Mazarei, a former International Monetary Fund official and now a senior fellow at the Peterson Institute for International Economics in Washington. “The day of arbitrary sanctions policy may be over. It will be a process that is much more subject to calibration. “
By marginally threatening Russia’s access to global markets, the Biden administration appears to be implementing a strategy similar to the United States’ strategy of isolating Iran. Successive American governments have attempted to pressure Iran to forego nuclear capacity development and to withdraw from supporting the Middle East insurgents by curtailing their links to the global financial system.
In business today
April 15, 2021, 6:56 p.m. ET
But Russia would be a far more difficult isolating power.
The United States and its allies in Europe are generally aligned in their objectives with Iran, although European business interests seek access to the potentially huge Iranian market. In contrast, Russia is an important supplier of energy to all of Western Europe. Russia is on the doorstep of the region and allows the European heads of state and government – especially Germany – to reject major conflicts.
Restricting Russia’s access to international bond markets amounts to “nibbling on the edges,” said Simon Miles, a Russia expert at Duke University. A major hit would threaten the Russian natural gas market in Western Europe.
Previous sanctions have denied Russia access to certain types of food and technology. The latest package targets Russia’s basic economic health as a pressure point.
“The signs are that the Biden government wants to make it hurt a little more,” said James Nixey, director of the Russia-Eurasia program at Chatham House, a research facility in London. “This is just a first volley.”
The United States ultimately separated Iran from the global financial system, which Washington could do since the American dollar is the world’s reserve currency, the medium of exchange for transactions around the world. Every bank around the world doing business for Iran risked being cut off from the international payments network and denied access to dollars.
Russia has very limited borrowing from abroad as it has greatly reduced its deficits following the sanctions imposed following the annexation of Crimea in 2014.
“We have seen a period of austerity and austerity since that sanctions shock,” said Elina Ribakova, deputy chief economist at the Institute of International Finance, a trade association that represents international banks. “You have prepared.”
Thursday’s Russian Debt Ordinance only applies to American financial institutions, but it could prompt multinational corporations outside the U.S. to recalculate the risks of transactions with the Russian government.
“It’ll get you noticed if you want,” said Mr. Nixey. “Every company that plays a significant role in Russia listens to this very, very carefully, wondering if it’s a good idea, if it’s a good idea in terms of reputation or political risk, if it’s theirs Business of the same volume as it is supposed to continue. “
Andrew E. Kramer contributed to reporting from Moscow.