Euro gains seen to be Russian bonds' Achilles heel

Moscow

SANCTIONS from the US have taken a toll on Russia's local debt, but a bigger threat may lurk much closer to home.

While tougher US penalties, first announced in June, put the breaks on gains in rouble bonds, the Russian central bank's monetary easing is still luring investors to the debt, which is on track to deliver an 11 per cent return in US dollar terms this year.

Goldman Sachs Group Inc, however, is warning of a new risk: the rouble's more than 7 per cent drop against the European currency will spur the cost of imports and fan inflation, forcing the Bank of Russia to scale back its rate cuts and prompting a selloff in so-called OFZ bonds. "Further capital gains in Russian fixed-income assets will likely be harder to realise," Goldman economist Clemens Grafe said i…