UPDATE 2-Rouble tries to regain ground after hefty blow from U.S. sanctions threat

* Imminent threat of U.S. sanctions batters Russian assets

* Rouble weakens 2% vs dollar, before recovering to 1% loss

* Touches 92.8500 vs euro, lowest mark since Nov. 3, 2020

* OFZs, sovereign dollar bonds, CDS all suffer (Adds analyst comments, details and bullets)

MOSCOW, April 15 (Reuters) – The Russian rouble pared losses on Thursday, after dropping more than 2% versus the dollar in early trade, as the imminent threat of new U.S. sanctions on Moscow, which may target sovereign debt, were largely priced in by investors.

The United States may announce sanctions on Russia as soon as Thursday for alleged interference in U.S. elections and malicious cyber activity, targeting several individuals and entities, people familiar the matter said on Wednesday.

Aggressive new measures targeting Russia’s sovereign debt were expected, a source said.

The Kremlin said on Thursday it would respond in kind to any new “illegal” U.S. sanctions on Russia.

By 1013 GMT, the rouble was 1.1% weaker against the dollar at 76.73, falling well away from the two-week high hit in the previous session and earlier losing more than 2% to 77.55.

It had lost 1% to trade at 91.88 versus the euro , earlier clipping a more than five-month low of 92.85.

The sanctions are long-awaited and priced in by the market, Sergei Romanchuk, head of foreign exchange and money markets at Metallinvestbank said, adding that news on sanctions increased the likelihood of the central bank hiking its key rate by 50 basis points to 5% next week.

Russia sovereign dollar bonds, OFZ rouble bonds and Russia 5-year credit default swaps – the cost of insuring exposure to sovereign debt – all took a hit earlier on Thursday before trying to regain ground.

The Wall Street Journal, citing sources, said a ban on U.S. financial institutions participating in the primary market of Russia’s government debt would take effect from June 14.

If applied, those restrictions would be similar to an earlier ban on U.S. banks participating in the primary market for non-rouble denominated bonds issued by the Russian sovereign. Those sanctions do not restrict the buying of Russian Eurobonds on the secondary market.

Russia’s 10-year benchmark OFZ yields – a proxy for borrowing costs – jumped 25 basis points at one point on the day before settling at 7.29% in the secondary market, hovering around levels last seen a year ago and also reached in late-March on geopolitical risks.

The proposed format of restrictions should not fundamentally affect the Russian market and the increase in OFZ yields can be levelled out quite quickly, said Promsvyazbank in a note.

A phone call between U.S. President Joe Biden and his Russian counterpart Vladimir Putin on Tuesday had eased fears of imminent sanctions and the rouble was boosted by Biden’s proposal for the two leaders to hold a summit to tackle a raft of disputes.

Lower oil prices on Thursday also added to the pressure on Russian stock indexes.

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