(Corrects headline to show ban applies to participating in primary market)
By Arshad Mohammed
(Reuters) - President Joe Biden will issue an executive order on Thursday authorizing the U.S. government to sanction any sector of the Russian economy and will use it to restrict Russia's ability to issue sovereign debt to punish Moscow for interfering in the 2020 U.S. election, senior Biden administration officials said.
The officials, who spoke on condition of anonymity, said Biden would bar U.S. financial institutions from taking part in the primary market for rouble-denominated Russian sovereign bonds from June 14. U.S. banks have been barred from taking part in the primary market for non-rouble sovereign bonds since 2019.
The latest step is part of a wider array of sanctions the White House plans to announce on Thursday to make Russia pay a price for "malign" actions such as election interference, cyber-hacking, the use of chemical weapons and reports that it offered Taliban militants bounties to kill U.S. soldiers in Afghanistan.
Among the sanctions to be unveiled are the blacklisting of about 30 entities as well as orders expelling about 10 Russian officials from the United States, one person familiar with the matter said.
Russia denies meddling in U.S. elections, orchestrating a cyber hack that used U.S. tech company SolarWinds Corp to penetrate U.S. government networks, and using a nerve agent to poison Kremlin critic Alexei Navalny. It has also brushed off allegations of putting bounties on U.S. soldiers in Afghanistan.
Biden on Tuesday spoke to Russian President Vladimir Putin to raise concerns about these issues and the build up of Russian forces in Crimea and along the border with Ukraine, even as he proposed a summit between the two men.
Biden appears to be trying to strike a balance between defending U.S. national interests against Russia while making clear he would prefer to have a less volatile relationship and to cooperate on issues such as curbing Iran's nuclear program.
"The American people should not be complicit in the Russian government's malign activities by directly funding the Russian state at a time when the Russian government is attempting to undermine our sovereignty and threaten our allies and partners," said one official, echoing the administration's desire for a "stable and predictable relationship" with Russia.
"We don't think that we need to continue on a negative trajectory in the relationship," he said. "However ... we will defend our national interests and impose costs for Russian government actions that seem to harm our sovereignty."
"Our goal here is number one to demonstrate resolve by taking an impactful step," he added. "The second goal is to ... be very clear in our signaling that we have the option to escalate in a far more forceful way if we so choose, and that really will be determined by Russia's actions."
This official said the executive order authorized the U.S. government "to target any sector of the Russian economy," adding "we will not hesitate to expand the Russian sovereign debt sanction if Russia escalates further."
The executive order on "Blocking Property with Respect to Specified, Harmful Foreign Activities of the Government of the Russian Federation," was signed by Biden on Wednesday and will be made public on Thursday morning, U.S. officials said.
The sovereign debt action, which will specifically cite the Russian central bank, national wealth fund, and finance ministry, extends a step the United States took in 2019, when it barred U.S. financial institutions from buying non-rouble-denominated debt directly from Russia in the primary market.
Neither move, however, affects Russian sovereign debt traded in the secondary market, meaning that U.S. persons can continue to buy and sell such bonds there.
The first U.S. official said the Russian rouble-denominated sovereign debt market was valued at about $185 billion, about a quarter of which is held by foreign investors. U.S. investors make up about half of the foreign holdings, he said.
"Judging from history, removing U.S. investors as buyers in this market will likely cause a chilling effect that raises Russia's borrowing cost, along with capital fight and a weaker currency – all of which leads to slower growth and higher inflation," said this official.
Dan Fried, a retired U.S. diplomat now at the Atlantic Council think tank, described the step outlined by the U.S. officials as "significant" and markedly stronger than former U.S. President Donald Trump's actions.
"We are signalling that we are prepared to do even more and there are steps that would be quite a bit stronger," he said, citing the possibility of "restrictions on trading in the secondary market, which would be a huge deal."