(Bloomberg) -- As the U.K. mulls further action against Russia in response to a nerve agent attack on a former spy on British soil, the question of whether policymakers should go after the bond market is back on the table.
Prime Minister Theresa May is under pressure from some U.K. lawmakers to look into Russia’s sovereign debt. The issue is “extremely important” and officials are monitoring the matter very closely, Kremlin Spokesman Dmitry Peskov said on Thursday.
But like their U.S. colleagues before them, U.K. policymakers may find this isn’t a path they’re prepared, or able, to go down. Here’s why:
Britain Can’t Act Alone
One option would be to put pressure on the two big European clearing houses to restrict them from processing new Russian bond sales. But neither is incorporated in the U.K., so Theresa May would need approval from her European counterparts for an EU-wide ban.
“The U.K. cannot force Euroclear or Clearstream to refuse the clearing of Russian bonds,” said Viktor Szabo, a fund manager at Aberdeen Asset Management in London. “It can try to impose EU sanctions on the Russian sovereign debt, which would have this effect, but I see this as unlikely at the moment.”
When, in 2016, Russia sold its first Eurobond since sanctions were imposed on individuals and industries over the Crimea crisis, Belgium-based Euroclear SA didn’t initially agree to handle it. Clearstream International SA hasn’t processed new Russian debt sales since 2013. The 2016 sale went ahead anyway and most foreign investors bought the bond when Euroclear accepted it two months later. Both clearing houses declined to comment on whether they would respond to pressure from the U.K. government over Russia.
Dependency Goes Both Ways
Imposing restrictions on Russian sovereign debt markets would push down prices of the country’s outstanding bonds. Since many of those assets are owned by international investors, including British pension funds, the U.K. would be shooting itself in the foot through its penalties. Investec Plc (LON:INVP), Legal & General Group (LON:LGEN) Plc and Schroders (LON:SDR) Plc are British money managers listed among the biggest holders of Russian Eurobonds, according to data compiled by Bloomberg.
Russia Can Survive Without Debt
In some respects, the sanctions imposed on Russian companies and individuals in 2014 showed that Russia can always muddle through on its own. Those restrictions forced the country to cut down on borrowing (albeit at the expense of economic growth), giving it a debt-to-GDP ratio of just 14 percent, one of the lowest in the world. Thanks to higher oil prices, the Finance Ministry may add about $35 billion to its rainy-day fund this year.
If Russia’s sovereign debt is sanctioned, the Finance Ministry would simply reduce borrowing, Finance Minister Anton Siluanov said in an interview with Russian TV Rain aired on Thursday.
The U.S. Already Decided It’s Not Worth It
The U.S. Treasury already looked into sanctioning Russian debt markets in response to alleged interference in the 2016 elections. Their conclusion: it would be too damaging for global markets. Their report on the subject published in February concluded that preventing American investors from buying Russian sovereign debt would hinder the competitiveness of asset managers.
“Because Russia’s economy has extensive real- and financial-sector linkages to global businesses and investors, the effects of the sanctions would not be limited to Russian authorities and business,” the report concluded.
