Russian bond market would survive sanctions, but yields would rise: deputy finmin

MOSCOW- Any tightening of western sanctions on an already pressured Russian domestic bond market would make borrowing more expensive for the government and trigger significant short-term volatility, a deputy finance minister said.

But a strong domestic investor base means the market, where a politically driven selloff has sent benchmark rouble yields to six-year highs, would survive the imposition of tougher curbs, Timur Maksimov told Reuters in an interview, adding that the ministry's 2022 issuance plans remained on track.

Russia has massed around 100,000 troops near the Ukrainian border while denying it plans to invade. If it does, western countries have threatened new financial and economic sanctions.

Under existing sanctions, U.S. investors are already banned from buying new OFZ bonds, and U.S. banks from buying sovereign Eurobonds directly from Russia.

U.S. officials have floated the possibility of extending the bans to cover secondary market trading of new issues of both instruments.

On Tuesday, the finance ministry cancelled OFZ auctions for a second week running as an ongoing selloff drove 10-year yields to their highest since 2016. 

Auctions will resume once the market "normalises", Maksimov said, adding that its current volatility was driven by politics rather than economics, and "such a situation cannot stay forever."

The market would ride out disruption caused if foreign investors sold all their OFZs, equivalent to just under a fifth of total holdings.

"It (new sanctions) will cause serious short-term volatility, but it will fundamentally change nothing. Because even if we wash 19% out of the portfolio, we still have 80% (held by domestic investors)," Maksimov said.

The finance ministry still plans to raise 3.3 trillion roubles ($41.5 billion) in OFZ bonds this year, re-introducing bonds with floating coupons in addition to its main fixed-coupon OFZs, he said.

($1 = 79.5984 roubles)

(Reporting by Darya Korsunskaya; Writing by Katya Golubkova and John Stonestreet) ((ekaterina.golubkova@thomsonreuters.com; +7 495 775 1242;))