What happened?

Us President Joe Biden said in a public speech after a video meeting with the leaders of the Group of Seven that the G7 agreed to press ahead with a "devastating" package of sanctions and other economic measures to hold Russia accountable.

Biden said all Russian assets in the United States will be frozen. The United States will work with its allies to limit Russia's ability to do business in dollars, euros, pounds and yen.

In addition, the United States will also weaken Russia's competitiveness in the high-tech economy in the 21st century. The US will impose sanctions on Russia's financial sector, with large Russian banks holding about $1,000bn in assets, and the US will immediately freeze the assets of VTB, Russia's second-largest bank.

The pain has been shown.

The Russian stock market plunged as much as 40% on Thursday after news of western sanctions, and Russia's benchmark stock index, the Moscow Exchange (MOEX), closed down 33.28% at 2058.12.

In the European market, the Russian trading system cash index RTS (dollar denominated) fell more than 50% to close down 38.3% at 742.91 points.

ETF and VanEck Russia ETF (RSX), the first to track Russian stocks in the US market, fell nearly 28% in intraday trading, closing down more than 19% in nearly two years, down for five consecutive days, and down more than 40% since the beginning of the year. The main holdings include Gazprom, Norilsk Nickel and Sberbank of the Russian Federation.

The Russian rouble was also not immune. At one point, the rouble approached 88.00 against the dollar, a record low and fell more than 8% on the day.

What does it mean?

In addition to the stock and foreign exchange markets, the Russian bond market is also under increasing pressure. Russian sovereign debt yields have risen sharply in recent days, whether denominated in rubles or in foreign currencies. International investors hold more than $60 billion of Russian sovereign debt, but with more sanctions, Russia's access to financing in the international market has been substantially closed. at present, few investors in the international market will buy Russian bonds, and there is very little demand in Russia.

The price of Russian dollar bonds maturing in 2047 has fallen to $70 from $110 in early February, with little turnover. Generally speaking, most of the bonds issued by Russia in the international market are US dollar bonds, but the benchmark currency issued in the past few times is the euro. The 50 per cent share of the bond issue was claimed by UK investors, suggesting a bigger systemic problem hanging over the credit markets: who will provide liquidity when everyone wants to exit?

Triple influence

Since the beginning of the year, emerging markets have been affected by rising US bond yields, exchange rate depreciation and capital panic.

On the one hand, the situation between Russia and Ukraine is heating up, with both sides massing troops in the border areas and heightened risk aversion in the market, causing money to flow out of risky assets and into traditional safe-haven assets. the upward demand for safe-haven assets has pushed up government bond yields in some emerging markets.

The data show that yields on 10-year Russian, Brazilian and Indian government bonds all rose sharply during the white-hot period.

On the other hand, recent market expectations for Fed interest rate hikes and contraction have intensified, with the dollar appreciating against emerging market currencies, while commodity currencies that have shown resilience due to high commodity prices earlier this week, and the euro have succumbed to worsening risk sentiment, pushing the dollar higher in disguise. Exchange rate depreciation has also become the "accelerator" of the decline of the MSCI index.

The problem of illiquidity in investment-grade bonds has not been truly tested since the 2008 financial crisis, with the exception of former ECB President Jean-Claude Draghi, who defended the eurozone "at all costs" during the European debt crisis. At present, as the world's major central banks tighten monetary policy to withdraw liquidity, the risk has quietly increased.

When the COVID-19 epidemic swept the world in early 2020, when it caused the credit crisis, the scope of powers and responsibilities of the world's central banks expanded from buying sovereign bonds to buying corporate bonds, but as the Federal Reserve launched a shrinking program, the Bank of England is also selling 20 billion pounds of bonds held, only the ECB still has 320 billion euros of investment-grade euro corporate bonds to sell. As asset purchases by major central banks stagnate, credit conditions in emerging markets will be tighter.

Judging from the list of G7 sanctions alone, it is likely to be punished not only by Russia, but also by Ukraine and the bonds and equities of the region's periphery, such as Polish and Finnish companies with large exposure to Russia and Ukraine.

Although there are no direct sanctions, the price of Ukrainian bonds in the storm of this military operation has fallen even more than that of Russia, and the greater risk lies in bonds that are due in the near future. the next noteworthy $7.75% coupon debt due in September 2022 currently has $912 million outstanding.

Ukraine, which currently has an international debt of about $23 billion, is negotiating with the IMF to secure a credit line of $700m. Although Biden and Western governments have promised aid, the attitude of the West may be different if Ukraine has become a "puppet" of Russia by then.