At the end of last week, the United States Treasury refused to rule out sanctioning new Russian bonds and the Russian bond market. This important piece of news got lost in the headlines that the Trump administration had not applied any further Russian sanctions at this time. The fact that such restrictions on one of the deeper and more important bond markets of the world are still being considered is a threat to global financial stability.
This is one of the many reasons why you need to invest in gold¬†with some of your retirement portfolio funds. Crumbling bond markets can easily lead to financial markets turmoil around the world. The good news is that research demonstrates how¬ gold offers insurance and protection¬†during market turbulence. It has served in this role well for more than five thousand years of human history. You need to know what gold goes in an IRA so that you can protect your retirement assets with a Gold IRA.
Trump Administration Wary of Attacking Russian Bond Market
The Trump administration has been careful¬†up to this point about how far it takes the Russian sanctions. An unclassified Treasury report¬†released last week via Bloomberg may shine some light on their caution.
The Treasury Department determined in the document that there would be dramatic financial consequences to increasing sanctions against Moscow to include all new sovereign debt issued by Russia and the associated debt derivatives. This graphic shows the different sectors¬†dependent on¬†it:
Treasury further sounded the alarm that the Russian government debt market is too large and significant for sanctions. Applying them would lead to a potential for worldwide financial turmoil. Specifically Treasury warned this might:
destabilize regional markets and then spread outside of Russia to create “negative spillover effects into global financial markets and businesses.”
This warning helps to explain why the U.S. Administration has been reluctant so far to go down this road.
Congressional Report Focused on Impacts of Bond Market Sanctions
The idea for the new report surrounding such impacts on Russian bond market sanctions originated with Congress. U.S. lawmakers in August passed the law that mandated it. This report was only shared with Congress this past week. The conclusions had not yet been revealed to lawmakers, investors, or the public.
The same law that ordered the report gave the administration a broad amount of discretion in implementing any additional sanctions. So far the administration has not added additional sanctions against the Russian defense sector. Similarly, the report on Russian billionaire oligarchs did not harshly¬†target any particular individuals.
While many¬†expected¬†a further¬ deterioration in U.S. and Russian relations¬†this at least has not been obvious so far. Last Tuesday Russian President Vladimir Putin stated that he would not retaliate as planned¬†against the United States for now.
It is likely that the findings of the Treasury report on Russian sanctions encouraged Putin’s restraint. It explained that attacking the Russian sovereign debt market would have dramatic consequences for the economic growth of Russia. The banking sector there and globally would suffer from an elevated strain. It also warned about “Russian retaliation against U.S. interests,” with its findings:
“Given the size of the Russian economy, its interconnectedness and prevalence in global asset markets, and the likely over compliance by global firms to U.S. sanctions, the magnitude and scope of consequences from expanding sanctions to sovereign debt and derivatives is uncertain and the effects could be borne by both the Russian Federation and U.S. investors and businesses. Expanding sanctions could hinder the competitiveness of large U.S. asset managers.”
It was findings like these that led to relief among Russian analysts and investors alike. Rosbank Analyst Yury Tulinov wrote:
“It’s very unlikely we’ll see harsh measures against Russian sovereign debt, at least in the foreseeable future.”
The previously unknown conclusions of this report and fear of additional sanctions were overhanging the debt markets in Russia.¬†This started when the Congressional law ordered studies on new sanctions and for a list to be drawn up with names of Putin connected officials and billionaires in Russia.
What remained unclear was why the Treasury Department would not release the unclassified report to the public sooner. The spokesman for the U.S. Treasury did not comment on this when asked.
Treasury Refuses to take Bond Sanctions Off the Table
It is interesting that investors have since decided such findings mean that the United States will not possibly pursue sanctions against the Russian national debt market. The reality may prove to be far different. Congress continues to pressure the president for more punishments in response to Russian interference in the presidential elections of 2016.
Equally important is that David Malpass the Treasury undersecretary for international affairs admitted the department had not eliminated the idea for such sanctions on Russia’s debt markets. Malpass stated:
“Treasury would consider all options. The report is an analysis of possible effects, not in any way a road map for or against sanctions. We don’t telegraph our future actions.”
More telling still was testimony from Secretary of the Treasury Steven Mnuchin. Last Tuesday he addressed the Senate in a hearing. In this appearance he stated that these reports will only precede new and additional sanctions against Russia for its actions in the last election. This is not soon enough for Democratic lawmakers. They heavily criticized the administration for not assessing the increased sanctions with the release of the reports.
Foreign Investors Own Huge Amounts of Russian Bonds
Another reason the administration has been hesitant to move forward with sanctions against Russian sovereign debt concerns the holders of it. More than a third of all international and local sovereign Russian debt is owned by foreign investors.
The three largest owners of ruble debt happen to be American companies. These are BlackRock Inc., JPMorgan Chase and Co., and Stone Harbor Investment Partners. Together their ruble denominated debts add up to a significant approximately $4.9 billion. Any sanctions on the Russian sovereign debt would likely significantly decrease the value of these companies’ bond holdings.
Moody’s Considers Raising Russian Debt Ratings
There is another strange twist to the possibility of Russian bond market sanctions. Credit ratings firm Moody’s stated that it will contemplate boosting the ratings on Russian debt to a level of investment grade. Moody’s said that they might do this even if the U.S. applies the Venezuela-like penalties that have made it difficult for the South American country to finance debt.
In fact Moody’s posted a positive outlook rating on Russia only a few weeks ago. This means that it may see its debt raised from junk territory over the coming year to 18 months. It seems that sanctions against the Russian sovereign bonds could actually harm the international markets as much or more than they might Russia’s own ability to finance itself.
Gold Protects Your Portfolio from Financial Chaos
The possibility of sanctions against Russian bonds can not be ruled out as the Treasury undersecretary pointed out himself. You should not discount the chances of this leading to financial turmoil around the world. This is why having gold in your portfolio is as important today as it has ever been. Now you know you why you should own gold in times of financial crisis. This is a good time to think about the Gold IRA rollover rules and regulations.