US House adds Russia debt sanctions to defense policy bill

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WASHINGTON — The U.S. House backed a provision that would extend the ban on Americans buying or selling newly issued Russian sovereign debt to secondary markets to punish Moscow for interfering in U.S. elections.

The measure, written by Rep. Brad Sherman, a California Democrat, and adopted by voice vote, will be included in the annual defense policy bill that is expected to pass the House with wide bipartisan support later this week. Its prospects in the Senate are unclear.

Targeting secondary-market trading of sovereign debt would mark a major escalation of the sanctions regime. Russian markets have benefited this year from the perception that President Joe Biden doesn’t want to confront the Kremlin as he deals with more pressing issues from China to Afghanistan.

The provision is one of several sanctions amendments in the House that threaten to revive investor concerns about possible new restrictions on Russia.

While the proposed legislation is “not as bad” as an outright ban on pre-existing bonds, “it’s certainly an issue,” said Sacha Tihanyi, head of emerging-market strategy at Toronto Dominion Bank. “It could ultimately raise financing costs for Russia, particularly during times of market turmoil.”The immediate market impact could be marginal, but the move could send a signal about future participation, he said.
The ban would target bonds in any currency issued by the Russian Central Bank, the Russian National Wealth Fund and the Russian Federal Treasury with a maturity of more than 14 days, according to Sherman’s provision.

Current U.S. sanctions ban the purchase of new issues of Russian sovereign debt but do not affect secondary trading. Foreign ownership of Russian bonds rose above 20% for the first time since April this month.

The legislation also requires the Director of National Intelligence to write a report on foreign interference in future midterm and presidential elections. The next midterm elections are in 2022, while 2024 is the presidential election year. After receiving the intelligence report, the president must determine whether to suspend or keep the sanctions in place.The U.S. Chamber of Commerce opposes the provision, arguing that it would limit the ability of American banks to serve their corporate clients operating in Russia.

“While intended to impose constraints on the Russian government, the legislation would have insignificant effect on its ability to secure funds in global markets – given the Russian government’s strong foreign exchange and gold reserves – while severely harming U.S. companies’ operations in Russia,” Neil Bradley, the Chamber’s executive vice president, wrote to House lawmakers Sept. 21.

The U.S. House this week also approved an amendment to the defense bill that would authorize new mandatory sanctions on entities and individuals responsible for the planning, construction, and operation of the Nord Stream 2 gas pipeline from Russia to Germany.

The amendment written by Rep. Michael McCaul of Texas, the top Republican on the House Foreign Affairs Committee, and Democratic Rep. Marcy Kaptur of Ohio, the chair of the House Appropriations Energy and Water Development Subcommittee, stands out because it would repeal the national interest waiver for sanctions required by existing law related to the pipeline project.

The Biden administration earlier this year waived sanctions to allow completion of the pipeline in return for German assurances Berlin would help protect Ukraine from a Russian energy cutoff. Nord Stream 2 is currently awaiting regulatory approval, a process Germany’s energy regulator said on Sept. 13 could take four months.

Another amendment likely to pass, written by New Jersey Democrat Tom Malinowski, would require the president to submit a list of 35 officials and businessmen who are candidates for sanctions to the relevant congressional committees.

The prospects of the provisions are unclear in the U.S. Senate. The House and Senate have to negotiate a final defense policy bill that will be sent to the president for his signature. The Senate hasn’t yet considered its version of the bill.

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