Thread by @JoshRudes

Two new sets of Russia sanctions are reportedly coming today:

1⃣ Designations of 20-30 entities (plus a dozen individuals and 10 PNGs)

2⃣ Executive order barring US financials from buying ruble sovereign debt after June 14

In both cases, the severity depends on the details. 🧵

Bloomberg says the designations hit "about dozen individuals, including gov't/intel officials, and roughly 20 entities ... The US is also expected to expel as many as 10 Russian officials/diplomats." CBS says it's "more than 30 Russian entities" & 10 PNGs. bloomberg.com/news/articles/…

More important than the number is whether the 20-30 entities are obscure and isolated entities that directly perpetrated the malign activity (usually not costly) or Kremlin-tied companies with international supply chains and financing (could be costly). ⬇️

https://twitter.com/JoshRudes/status/1382497511521259521?s=20

As for the executive order prohibiting purchases of sovereign debt, there are slightly conflicting reports. CBS News says it's "an executive order barring U.S. financial institutions from purchasing ruble-denominated bonds beginning in June of 2021." cbsnews.com/news/russia-sa…

WSJ says "the measure will expand the existing prohibitions on US banks trading in Russian gov't debt ... prohibits US financial institutions from buying new bonds directly from Russia's central bank, finance ministry & sovereign wealth fund after June 14."wsj.com/articles/u-s-t…

I've been saying for 2.5 years that sanctioning Russian sovereign debt is a good option to impose some costs & spill-over concerns are over-stated. Here's my piece w/ @brianoftoole, published the night before a Senate hearing that solidified this consensus.atlanticcouncil.org/blogs/new-atla…

When the Trump administration started "sanctioning Russian sovereign debt" after much foot-dragging as part of the Skripal/CBW measures, Treasury slipped into the implementing directive 2 technical details that neutered it from having any practical impact.

https://twitter.com/JoshRudes/status/1157866649061679105?s=20

One problem was that it excluded ruble-denominated debt. That issue will quite clearly be fixed based on the CBS News reporting that today's sanctions will prohibit "purchasing ruble-denominated bonds."

https://twitter.com/JoshRudes/status/1157866655537647617?s=20

The other problem w/ Trump's 2019 prohibition is it only covered "participation in the primary market," which only meant managing issuance processes, a job US banks don't do anyway (VTB does). No holds barred after bonds are free to trade in the secondary.

https://twitter.com/JoshRudes/status/1157866671664783361?s=20

To illustrate how ineffectual that was, consider the most influential bond buyer in modern history: The Federal Reserve, which is legally prohibited from buying Treasuries in the primary market to preserve its independence. So instead, it just buys bonds in the secondary market.

Just as Fed open market purchases dramatically reduced Treasury borrowing costs (because primary market buyers anticipate Fed demand in the secondary), Trump's "sovereign debt sanctions" gave US investors the green light to reduce Russia’s borrowing cost via the secondary market.

It's unclear whether this problem will be fixed today. CBS just refers to "purchasing" bonds, while WSJ contradicts itself by first saying "trading" (strong) and then "buying new bonds directly from [the Russian gov't]" (weak). Existing debt would stay grandfathered either way.

That's the first detail I'll check in today's new executive order: whether it prohibits any "dealing" (strong) in debt issued after June 14 or whether it only prohibits a limited activity like "participating in the primary" or "buying directly" from Russia (weak).

Stay tuned! 🍿

UPDATE: As promised, the first thing I checked is the sovereign debt text, and it doesn't look good. Treasury is sticking with the weak 2019 language of "participating in the primary market." Just added "ruble or non-ruble denominated bonds issued after June 14, 2021."

Reuters confirms my understanding this doesn't restrict dealings after the bonds are free to trade (a day or two after pricing). Read the thread above—comparison to bond buying by the Fed, which is legally barred from buying directly from Treasury—to see how ineffectual that is.

For anyone looking for Treasury's official confirmation that these sovereign debt sanctions don't touch secondary market trading (even for bonds issued after June 14), it's here. ⬇️

The fact that OFAC has an FAQ about secondary market activity being untouched shows that they're aware of their limited approach but did it anyway. My sense is that they remain extremely risk adverse regarding anything that could end up being unsustainable like sanctioning Rusal.

But fully sanctioning dealings in sovereign debt issued in the future wouldn't be destabilizing. Investors have had years to prepare, the Russian debt market is not that big (13% of GDP), and US holdings are minor (8% or $11bn), as @brianoftoole & I argued.atlanticcouncil.org/blogs/new-atla…

Treasury is telling reporters it's strong b/c removing US investors from Russian markets in 2014-15 was major. But some of that was oil prices, some was a general sense of escalation, and some was the fact that those financing restrictions prohibited any dealings (secondary too).

The White House fact sheet does have an interesting line warning that they could "expand sovereign debt sanctions on Russia as appropriate."

The only good argument I could imagine for taking such a limited approach today (which isn't the argument Treasury is making) is that they want to give Putin two options for the months ahead: Behave yourself and get a summit with Biden, or misbehave and get real costly sanctions.

I should also note that there are no significant sanctions today of oligarchs or their companies. The company with the most apparent international ties is Positive Technologies, and their bonds are indeed taking a beating. I'd be interested in reporting on who owns that company.

Lastly, let me point out 2 good things the admin. did today. First, the executive order on "harmful foreign activities" does a good job of setting out malign behaviors that won't have to be fit into the Ukraine, elections, cyber, and CBW legal frameworks.whitehouse.gov/briefing-room/…

Second, the exposure and attribution of Russian intel services and the technology companies that support their malign influence operations are significant and important, arguably the way democracies use true info to fight back manipulative disinfo.

https://twitter.com/RidT/status/1382677093620838409?s=20

That may help win over hearts and minds that aren't in the Kremlin, but again, my main reaction is there's nothing today that will not be interpreted in Moscow as imposing a sufficient cost to deter their activity of foreign aggression.

More information here on Positive Technologies, a $1 billion firm that takes orders from the Russian government and helps it develop cyber tools and potentially run operations. technologyreview.com/2021/04/15/102…

Final update: Here’s my piece arguing that while this isn’t enough to deter Putin, it offers him an off-ramp, and even if he doesn’t take it, it helpfully starts to lay out the credible signaling, information, and legal framework to escalate with allies. ⬇️justsecurity.org/75775/limited-…