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Russian Markets Unruffled as U.S. House Raises Sanctions Risk

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(Bloomberg) -- Russian investors shrugged off U.S. House backing for a provision that could extend bond-trading curbs to the secondary market as punishment for Moscow’s alleged interference in U.S. elections.

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Currently, Americans are banned from buying new Russian sovereign debt. The latest measure, written by Representative Brad Sherman, a California Democrat, and adopted by voice vote, would extend those restrictions to trading newly issued government bonds in the secondary markets.

The provision will be included in the annual defense policy bill that is expected to pass the House with wide bipartisan support later this week. Its prospects in the Senate are unclear.

For Russian markets, the latest threat of sanctions was overshadowed by buoyant investor sentiment after the Federal Reserve’s measured approach to tapering. While Russian bonds fell at the start of trading on Thursday, they later pared their drop. The ruble and stocks climbed.

“The markets are so used to this sanction news -- it’s not the first proposal and not the last,” said Viktor Szabo, a fund manager at Aberdeen Asset Management in London. “They will keep it on a shelf as a warning to Russia.”

Major Escalation

Targeting secondary-market trading of sovereign debt would mark a major escalation of the sanctions regime. Russian markets have benefited this year from the perception that President Joe Biden doesn’t want to confront the Kremlin as he deals with more pressing issues from China to Afghanistan.

Current U.S. sanctions ban the purchase of new issues of Russian sovereign debt but do not affect secondary trading. Foreign ownership of Russian bonds rose above 20% for the first time since April this month.

The provision is one of several sanctions amendments in the House that threaten to revive investor concerns about possible new restrictions on Russia. The House and Senate have to negotiate a final defense policy bill that will be sent to the president for his signature. The Senate hasn’t yet considered its version of the bill.

‘Long Path’

Dmitry Peskov, spokesman for Russian President Vladimir Putin, said the sanctions have a “long path” before they could come into effect and dismissed the provision as an “internal parliamentary exercise.”

The U.S. Chamber of Commerce opposed the debt provision, arguing that it would limit the ability of American banks to serve their corporate clients operating in Russia.

“While intended to impose constraints on the Russian government, the legislation would have insignificant effect on its ability to secure funds in global markets – given the Russian government’s strong foreign exchange and gold reserves – while severely harming U.S. companies’ operations in Russia,” Neil Bradley, the Chamber’s executive vice president, wrote to House lawmakers Sept. 21.

The U.S. House this week also approved an amendment to the defense bill that would authorize new mandatory sanctions on entities and individuals responsible for the planning, construction, and operation of the Nord Stream 2 gas pipeline from Russia to Germany.

Another amendment likely to pass would require the president to submit a list of 35 officials and businessmen who are candidates for sanctions to the relevant congressional committees.

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