Russia will offer only new OFZ government bonds after US sanctions

Russia will offer only new series of OFZ government bonds and stop offering existing series of debt, the finance ministry said on Wednesday, after the United States prohibited buying Russian government bonds issued after 1 March.

The US government slapped restrictions on trading of Russian government debt on Tuesday in a bid to punish Moscow for ratcheting up its conflict with Ukraine, extending its existing sanctions on buying of Russian debt to the secondary market.

Addressing the new sanctions, the Russian finance ministry said it would offer only new series of OFZ bonds starting from 22 February and stop offering OFZ bonds registered before this date.

The decision was made"in order to lower risks of forced selling of circulating state securities by particular categories of foreign investors," the ministry said in a statement.

The new sanctions did not ban US entities from holding Russian OFZ bonds they had purchased previously.

The ministry said it was flexible with borrowing as it had enough free funds in the amount of more than 4.5 trillion roubles ($56.7 billion) on its treasury account, more than double the 2022 net borrowing plan.

Russian OFZ bonds fell further after the sanctions, with yields on 10-year OFZ bonds , which move inversely to prices, hitting their highest since early 2016.

OFZ bonds are designed to plug budget holes but Russia has no urgent need in borrowing and runs a record high current account surplus thanks to high prices for oil and gas, its main export.

The finance ministry cancelled weekly auctions of OFZ bonds this week as the Russian market took a hit from President Vladimir Putin's decision to recognise two breakaway regions in eastern Ukraine, a move condemned by the majority of countries.

On Wednesday, the finance ministry said it would study the market situation when deciding on the resumption of auctions and would tend to offer more instruments with shorter tenors and thus a lower percentage risk.

OFZ bonds used to be popular among foreign investors due to their relatively high yields but non-residents have cut exposure to Russia in recent months as geopolitical tensions increased.

US financial institutions were already barred from buying rouble-denominated Russian sovereign bonds directly from Russia, in addition to sanctions that banned them from buying non-rouble sovereign bonds.

The finance ministry said it was monitoring the financial market situation together with the central bank, adding they both were ready to take extra measures to beef up financial stability.

The central bank has said it is ready to take all necessary measures to support financial stability, as Russian assets were hammered after Putin ordered the deployment of troops to two breakaway regions in Ukraine.

($1 = 79.4140 roubles)