RUSSIA’S RESILIENCY TESTED AS USA LATEST BLOW TO WEAKEN ROUBLE

US have gone this time for real financial sanctions that are designed to harm Russia by raising its borrowing costs and weakening the rouble. Russia has more strength than most developing countries to absorb such blows.Russian banks too can absorb surplus debt. But it will likely reduce market liquidity - Russian investors mostly buy to hold - while yields should rise at least at the margin.

For all the insouciance with which markets treated Washington's latest sanctions on Russia, its move to target Moscow's main funding avenue - the rouble bond market - has in some ways, crossed the Rubicon, potentially with far-reaching consequences.

Sanctions in 2019 made future Russian dollar debt ineligible for major bond indexes, such as JPMorgan's EMBI Global. JPM, which runs the most popular emerging debt benchmarks, may exclude newly issued OFZ too That means investors tracking those indexes, or using them to benchmark performance, won't feel the pressure to buy OFZs.Foreigners have already cut OFZ exposure to six-year lows. U.S. investors hold nearly 7% of the total. Extrapolated to the expected $37 billion worth (2.8 trillion roubles) of OFZ sales this year, the removal of U.S. buyers would remove $2.6 billion in demand.

Russia's 4.2% share in JPM's corporate bond index is down from 5.6% in 2013. It will shrink further as many big Russian firms and banks are barred from dollar debt markets.

Lower anticipated investment is another way the sanctions could bite. Domestic investment slumped after the 2014 and 2018 sanction rounds, while bricks-and-mortar foreign direct investment is around 1% of GDP, down from 3%.

Russia’ having debt-to-GDP ratio of around 20% is under a fifth of U.S. levels and certainly have resiliency to sustain such sanctions. However dented growth prospect due to global marginalisation, which poised for risingrisk is of a longer-term corrosion of the economy.