Echoing the Treasury Department's decision to prohibit trading in Venezuelan "hunger bonds" in US markets, UK Prime Minister Theresa May is mulling whether to throw her support behind a measure that would ban the sale of Russian sovereign debt in City of London financial markets.
And just like with Venezuela, such a short-sighted prohibition wouldn't make it any more difficult for Russia to sell its sovereign debt. Rather, Russia would be forced to turn to China to compensate for the shortfall, according to the Guardian.
May's decision to look into the ban comes at the behest of Foreign Affairs Select Committee Chairman Tom Tugendhat, who has repeatedly urged May to do more to punish Russia for allegedly masterminding the poisoning of former Russian spy Sergei Skripal and his daughter Yulia with novichok - a Soviet-era nerve agent. Most recently, the tensions between the UK and Russia have precipitated a round of diplomatic expulsions, with more than two dozen countries expelling at least some Russia diplomats.
EU and US sanctions against Russia didn't prohibit the bond sales because of a loophole that effectively set up Russian bank VTB as the main liaison between the Russian state and western financial markets. Now, Tugendhat and several of his allies in Parliament are calling for the loophole to be closed - on both sides of the Atlantic. Tugendhat has spoken about the loophole at least three times in the past week.
The denunciations come as Tugendhat's committee is beginning an investigation into how the UK enables allies of Russian President Vladimir Putin to store and spend their money in the UK.
Tugendhat has proposed that Russian bond sales are no longer made available to key western clearing houses such as Euroclear and Clearstream, making them effectively untradeable on the secondary market and so deterring the majority of EU and US investors from buying them.
Last month’s sale was specifically skewed to make it attractive for Russian citizens living overseas to repatriate their money to Russia, a long-term goal of Putin.
According to Tugendhat and several of his advisors, cutting off Russia's access to Western markets would be the best way to undermine Putin's regime, per the Guardian.
Tugendhat has been briefed by a British research fellow at the Harvard Society of Fellows, Emile Simpson, who has argued Russia’s greatest weakness is its dependence on western investors. He contends a policy blindness leads the west to sanction individuals, and sometimes sectors, but not to look at sanctioning the Russian state as a whole.
He said: "At present, Russia can borrow in EU and US capital markets despite western sanctions and then can support the sanctioned Kremlin-linked banks and energy companies that can no longer do so".
Tugendhat alleges that the bond sales are one way wealthy Russians can move their money back to Russia.
Urging the foreign secretary to look at the issue, Tugendhat said: "One of the ways that people are getting their money out of this country is by allowing Russian sovereign debt to be sold in the UK, and that debt to be used to reimburse Russians, in a way, to bring back their money onshore, in Moscow terms. As that gold is moving towards Moscow, we are, quite extraordinarily, enabling those bond auctions, those debt auctions."
Of course, thanks to Russia's relatively low public debt levels ($122 billion in domestic debt and nearly $40 billion in Eurobonds) and its growing economy, there will likely be no shortage of buyers for Russian debt.
Recently, Russia has bragged about the strong demand for its recent auctions (as is evident by the rise in bid-to-cover sen above), saying it might take advantage of low interest rates and offer more Eurobonds thanks to interest from German investors.
Certainly, any economic stress that US sanctions are supposed to putting in Russia are not showing in its sovereign credit risk...
And while sanctions could have an immediate impact, it wouldn't take Russia long to source new investors in mainland China.