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The trail of destruction left by U.S. sanctions against Russia’s most influential oligarchs spread to President Vladimir Putin’s government as surging borrowing costs forced the Finance Ministry and the biggest state bank to pull bond sales.

It’s the first debt auction Russia abandoned since cancellations in 2014 and 2015, when Putin’s annexation of Crimea soured relations with the U.S. and European Union. Growing panic over how far America will go at blacklisting wealthy Russians and their businesses sent the ruble and bonds tumbling.

“It’s finally sinking in that the U.S. Treasury actions are a major game changer in terms of how one should view Russian market risks," said Timothy Ash, a senior emerging-market strategist at BlueBay Asset Management LLP in London. "The U.S. administration made it clear that no Russian oligarch can now escape."

The latest sanctions are notably worse than earlier ones because they specifically bar any trading of securities of targeted companies rather than just blocking their access to new international fundraising. Among those named were billionaire Oleg Deripaska, who owns aluminum giant United Co. Rusal -- which lost half of its market value in Hong Kong on Monday alone.

Oleg Deripaska Photographer: Chris Ratcliffe/Bloomberg

Global companies are rushing to distance themselves from the blacklisted oligarch. Glencore Plc, the world’s largest commodities trader, said on Tuesday it’s scrapping a plan to swap its stake in Rusal for shares in another one of Deripaska’s companies, London-listed En+ Group Plc. Its chief executive officer, Ivan Glasenberg, also resigned from Rusal’s board.

The impact of Friday’s sanctions reverberated through commodities markets. Aluminum extended its biggest two-day gain in more than six years on concern production from Rusal will be prevented from reaching global markets.

Russia ‘Outgunned’

U.S. President Donald Trump’s threat to respond “ forcefully" to a chemical weapons attack in Syria over the weekend added fuel to the fire because he’s suggested that Putin may have had a hand in the incident. The White House said Tuesday that Trump is contemplating a military response.

The ruble depreciated 4.3 percent to 63.275 versus the dollar, taking its decline this week to 8.1 percent. Russian stocks rose 3.9 percent, partly reversing an 8.3 percent slide on Monday, mostly because other non-sanctioned exporters benefit from the weaker currency since their earnings are in dollars and costs are in rubles.

"My sense, is that economically at least, Russia is outgunned and they will seek to save face and not exacerbate the situation," said Julian Rimmer, a London-based emerging-markets trader at Investec Bank Plc. "My advice to clients, therefore, is to buy shares into this weakness, especially Sberbank, and hold onto your shapka."

Containing Damage

Russia’s economic retaliation options are limited. If it were to take aim at U.S. companies, that would hurt its access to technology and investment at a time when Putin is trying to attract it, Alexei Kudrin, a former Russian finance minister, told reporters in Moscow on Tuesday.

What Russia can afford to do is contain the damage -- it has $458 billion of international reserves, the most since 2014. The central bank said on Tuesday it won’t hesitate to sell dollars if needed. Policy makers, who’ve cut borrowing costs for months, can also use interest rates to offset any increase in inflation, Governor Elvira Nabiullina said at a conference in Moscow.

When the ruble went into freefall in December 2014, she did just that -- hoisting the key rate by 650 basis points overnight in a move that eventually calmed market panic.

The turmoil comes less than two months after S&P Global Ratings reinstated Russia’s investment-grade standing, prompting massive inflows. But the tables turned against Russia quickly in recent weeks since the U.K. accused the country of poisoning an ex-spy on British soil. Britain and allies including the U.S. have expelled more than 150 Russian diplomats.

It took the sanctions to really rattle investor confidence, though. Yields on government ruble-denominated debt due in January 2028 surged 27 basis points to 7.59 percent on Tuesday. In addition to the canceled Finance Ministry auction, Sberbank PJSC postponed a local bond sale because of the "negative market dynamic."

The penalties have "introduced an enormous amount of unpredictability from the U.S. authorities as to the future trajectory of the sanctions, whom they’re going to target and the nature of the sanctions that they’re going to use," said Paul Greer, a London-based money manager at Fidelity International, which reduced its holdings in Russian bonds in early March.





— With assistance by Netty Idayu Ismail, and Alexander Nicholson