Escalating European Union and U.S. sanctions jeopardize access to funding for Russian companies, threatening to cut them off from international capital markets that have provided at least $600 billion in debt and equity financing since the country emerged from its 1998 default.
Russian businesses have about $165 billion in dollar- and European-currency denominated bonds and more than $100 billion in offshore syndicated loans currently outstanding, according to data compiled by Bloomberg. They’ve also raised more than $40 billion selling American and global depositary receipts abroad over the past 15 years. Banks based in China, which remains friendly with President Vladimir Putin’s government, won’t be able to fill the breach, said Ian Hague, founding partner of New York-based Firebird Management LLC.
“It’s highly unlikely Russia would be able to replace borrowing and equity issuance in global capital markets with other sources of funds,” said Hague, who helps manage $1.1 billion, including Russian stocks. “If Russia persists in its strategy of fighting a proxy war against Ukraine in Donetsk and Luhansk, even more significant sanctions will follow.”
The European Union said yesterday it would prohibit Russian state-owned banks from selling shares or bonds in the world’s main capital markets in an effort to force Moscow to end support for separatists in eastern Ukraine. The sanctions don’t cover syndicated loans, according to an EU official who spoke to reporters in Brussels yesterday on the condition of anonymity.
A separate blacklist will be published today barring eight people and three entities from all business with the EU. The European measures, endorsed by representatives of national leaders, will take effect when the legal texts are published on July 31.
The U.S. already prohibits any transactions with Russian lenders including St. Petersburg-based OAO Bank Rossiya, Ufa-based OAO InvestCapitalBank and OOO SMP Bank and OAO Sobinbank, both based in Moscow. OAO VTB Bank, OAO Bank of Moscow and OAO Russian Agricultural Bank yesterday became the latest targets of U.S. penalties.
The measures prohibit U.S. persons from transacting with, providing financing for or otherwise dealing in new debt of longer than 90 days maturity or new equity with the three banks, the U.S. Treasury Department said on its website.
VTB, the nation’s second-largest lender, slid 1.9 percent at 6:20 p.m. in Moscow, after retreating as much 3.8 percent. The bank’s 2022 dollar note fell for a sixth day, sending the yield five basis points higher today to 8.27 percent. About half of VTB’s $36.7 billion of outstanding bonds and loans tracked by Bloomberg are denominated in dollars or euros.
“We are confident that we will continue to be able to attract funds as and when needed,” VTB said today in a statement.
“If necessary, adequate measures will be taken to support the said organizations with the view of protecting interests of their customers, depositors and creditors,” the central bank said in an English-language statement on its website today.
Russia’s Micex Index rose 1.1 percent amid gains by OAO Sberbank, the biggest bank, which was not included in the list.
In a sign that investors have already cut back, Russian companies have sold just $4.1 billion of bonds abroad since mid-March, less than a fifth of issuance in the same period last year, data compiled by Bloomberg show.
Offshore bonds from Russian companies have lost an average 5.9 percent this month, the most among investment-grade securities worldwide, according to Bank of America Corp. index data. Notes from Sberbank, OAO Russian Railways and OAO Gazprombank led declines.
The sanctions come almost 16 years after Russia defaulted on $40 billion of domestic debt in August 1998 and devalued the ruble, erasing people’s savings overnight, triggering runs on bank deposits and sparking hyperinflation.
Any alternative funding that Russian banks might find in China, South Korea, Qatar or the United Arab Emirates would be short-term and insufficient to replace lenders in Europe and the U.S., said Aleksei Belkin, who helps manage about $4 billion as chief investment officer at Kapital Asset Management LLC in Moscow.
Financing from Chinese sources would be problematic, said Hague of Firebird Management.
“The Chinese would look askance at significant bilateral lending to Russia that’s not accompanied by significant resource development projects in return,” Hague said. “The Russians have not shown that they are willing to offer their resources to foreigners at large discounts, so it’s hard to see the two sides being able to agree on terms for very large deals.”
Some of the projects in need of capital are energy pipelines in eastern Russia, stadium and related construction for the 2018 World Cup and infrastructure in Crimea, Hague said.
The sanctions “will likely force a further contraction in domestic credit growth and hence the economy,” said Alexander Moseley, senior portfolio manager in New York with Schroders Plc, which oversees $100 billion in fixed-income assets.
The crisis in Ukraine worsened in February, when protesters ousted their pro-Russian president. Putin seized control of Crimea in March. Clashes between pro-Russian militants and Ukrainian military in the eastern part of Ukraine continue.
The EU move was “inevitable,” and “additional steps are possible,” German Chancellor Angela Merkel said in a statement. “It’s now up to the Russian leadership to decide if it wants to follow the path of de-escalation and cooperation.”
Russia will cope with financing itself in the short term, and probably also in the midterm, Michael Ganske, head of emerging markets at Rogge Global Partners Plc in London, where he helps manage $8 billion in developing-nation bonds and currencies, said by e-mail. “I hope that Putin gets the message and that all sides go back to rationality and sit down at a table,” he said.
To contact the editors responsible for this story: Nikolaj Gammeltoft at email@example.com Bob Ivry, Stephen Kirkland