LONDON/NEW YORK - A threat to impose sanctions on Russian sovereign debt transactions is one of the biggest financial weapons that the U.S. can deploy against the Kremlin, but Moscow's slide down the investment league table in recent years means the move will not pack the punch it once would have.
A bipartisan group of U.S. senators introduced legislation on Thursday aimed at penalising Russia for interference in recent elections, something the Kremlin strongly denies, as well as for its annexation of Crimea and actions in Syria.
The sanctions would need to be passed by the full House and receive President Donald Trump's signature, but if they do become a reality it would mark a new low in relations between the former Cold War foes.
They would also hit the energy sector, Russian uranium imports and a host of oligarchs, but it is a move to ban purchases of any new Russian sovereign debt going forward that has raised the most eyebrows.
It is considered one of Washington's most potent tools because it would effectively freeze the Russian government out of international borrowing markets, creating a similar scenario to that faced by Argentina for a decade until 2015, following a default and a U.S. court ruling against it.
The measure may create fewer problems for Russia though than were faced by Argentina, given Russia has one of the lowest debt levels in the world and nearly half a trillion U.S. dollars in reserves thanks to huge oil and gas export revenues.
Russia is also used to belt-tightening during difficult times and has sharply cut back on issuing dollar debt after the Ukraine crisis. In addition, Russia features less in emerging market investors' portfolios than it did even five years ago.
"Russia is still an overweight for most people at the moment, but this isn't going to kill the fund industry by any means," said Peter Kisler, an emerging market debt manager at North Asset Management.
As overseas borrowing by the Russian government and companies has shrunk, so has the country's weighting on bond indexes that are used by investors.
For instance, Russia comprises just 3.6 percent of JPMorgan's EMBI Global "hard currency" sovereign bond index, compared to 9.0 percent in 2007.
On the CEMBI corporate debt index, it amounts to 5.0 percent, down from 14 percent 10 years ago.
Russia's weighting in global bond indexes png https://tmsnrt.rs/2K7y48s
So in theory at least, it would be relatively easy for investors to bypass Russia in portfolios, even if its debt is a current favourite due to scarcity value and the country's rock-solid payment credentials.
Mike Cirami, co-director of global income at Eaton Vance in Boston said the weighting of Russian debt was now small enough and the premium it offers was low enough for investors to easily be able to jettison it if needed.
"If all you were was an EMBI investor, you could forget that Russia exists in my opinion, and you could manage just fine and not have any problems outperforming (the benchmark EMBI Global Diversified)," he said.
Russia has a higher 7.6 percent weight in the index for emerging local currency bonds, the GBI-EM. That's up from 1.5 percent in 2007, but off the 10 percent index-maximum it hit during the 2012-14 oil boom.
But while rouble government debt, known as OFZ, has been popular with investors, Deutsche Bank analysts last week highlighted a decline in foreigners' share of the market. Central bank data showed foreign holdings at 28 percent in June, the lowest since February 2017.
Foreign investors have sold Russia's rouble denominated debt
It is by no means certain that U.S. sanctions will be deployed as many reckon the Treasury will hold off from such aggressive measures.
"I would say that our base case is that Russian sovereign would be a last-resort sanction, whereas they are likely to use the corporate sector to target individuals and companies from a sanctions perspective," said Shamaila Khan, head of emerging markets fixed income at AllianceBernstein in New York.
"The fact is, once you embark on a sanctions path you just don't know where it ends," added Khan, who said unpredictability could weigh on Russian asset prices generally.
The developments nonetheless focus attention on how Russian markets have stagnated relative to those in other developing economies. Its importance over the last decade has declined for bond as well as equity investors.
Russia's weighting on MSCI's emerging equity index, a benchmark for almost $2 trillion in cash, has dwindled to 3.3 percent from over 10 percent in 2007. China's weight, meanwhile, has almost doubled in that period to nearly 30 percent.
That reflects Russia's own stagnation, says Renaissance Capital's global economist, Charles Robertson. He notes the three biggest companies in Russia's equity index are the same ones as back in 2007 - Gazprom, Sberbank and Rosneft. All are state-controlled.
"At one point, we were asking whether Russia's GDP was going to catch up with California's," said Robertson "That is certainly not going to happen now."
And unless there is a shake-up in the Russian political order and economy, these commodity-reliant companies can expect to hang on to their top positions, he predicted.
Contrast this with the United States, where the top rankings change every decade or two. China is replicating that dynamic with technology giants such as Tencent and Baidu taking over from previous companies that topped the rankings, including state-run oil firms and banks. Within MSCI's emerging equity index too, technology firms have displaced commodity producers as the biggest firms.
Russia's Gazprom was the biggest company in the index back in 2007. Today it does not make the top 10.
Will sanctions on Russia cause major impact? interactive https://tmsnrt.rs/2mTxgen
Will sanctions on Russia cause major impact? png https://tmsnrt.rs/2mRF8Nl