April 25 (Bloomberg) -- OAO Gazprombank executives are preparing Russia’s third-largest lender for possible U.S. sanctions as the Obama administration gets ready to respond to escalating tensions in Ukraine, according to two people with knowledge of the deliberations.
Gazprombank is a potential target, said a U.S. official, who asked not to be identified because the information is confidential. Another Russian state-controlled financial institution, development lender Vnesheconombank, is taking precautionary measures against possible sanctions, according to one person familiar with talks at that bank. Spokesmen for Gazprombank and VEB, as it’s known, declined to comment.
Group of Seven nations are preparing new measures, German Chancellor Angela Merkel said today after the U.S. accused Russia of imposing its will on Ukraine at “the barrel of a gun and force of a mob.” President Barack Obama discussed deepening sanctions with Merkel and leaders from France, the U.K. and Italy in a conference call, a day after U.S. Secretary of State John Kerry said Russia is running out of time to ease tensions.
“Of the large institutions, VEB and Gazprombank do seem to be the most likely to be sanctioned,” Tim Ash, London-based economist for emerging markets at Standard Bank Group Ltd, said by phone. “VEB is a facilitating bank for the government and is systemically important while Gazprombank is a very large lender with links to Gazprom.”
Gazprombank conducts business “in strict accordance with international laws” and sees “no reasonable grounds” for sanctions, the lender’s press service said last week by e-mail.
Russia is aware of broad tools the U.S. is prepared to use if the country doesn’t meet the commitments under last week’s Geneva agreement, which called for de-escalation in Ukraine, said a Treasury official, who asked not to be identified because the future actions haven’t been announced yet. Measures are being considered against individuals, as well as financial services, energy and defense, Treasury Secretary Jacob J. Lew said last month in a statement.
Sanctions already announced have intensified a selloff in the ruble and capital flight from Russia amid the worst standoff with the U.S. and its allies since the Cold War, pushing the economy to the brink of recession. Prime Minister Dmitry Medvedev this week said the government is prepared to protect itself from “unfriendly actions” as the Ukrainian crisis escalates.
Standard & Poor’s today cut Russia’s sovereign rating one level to BBB-, the lowest investment level, saying it may face further downgrades if economic growth deteriorates and the U.S. and Europe apply wider sanctions over the conflict in Ukraine. The central bank in Moscow unexpectedly raised its benchmark interest rate by a half point to 7.5 percent.
Russia’s stock market, the ruble and Russian bonds have suffered amid the crisis. The benchmark Micex Index slumped 1.6 percent today, extending its drop this year to 15 percent compared with a 1 percent decline in the MSCI Emerging Markets Index. The ruble has lost 8.9 percent against the dollar over the same period.
Gazprombank’s dollar-denominated eurobond maturing in 2019 sank 2.5 percent, pushing its yield 54 basis points higher to 6.23 percent and its biggest drop since it started trading in March. Its perpetual bond plunged 3.2 percent, pushing its yield 98 basis points higher to 10.17 percent and it’s highest since its sale a year ago.
Additional U.S. and European Union sanctions to freeze assets and block transactions with Russian individuals or institutions are inevitable if Russian President Vladimir Putin escalates cross-border interference or fails to comply with the accord reached in Geneva last week to disarm rebels in eastern Ukraine, U.S. state and treasury department officials in Washington said.
They declined to comment on which, if any, Russian financial institutions or executives may be targeted next for penalties.
New sanctions are unlikely to be announced before Obama returns from Asia on April 29, though they could come this week if Russia dramatically escalates, according to U.S. officials who spoke on condition they not be named because they weren’t authorized to be quoted.
Putin warned Ukraine yesterday against continuing an anti-separatist offensive after government troops killed five rebels and prompted Russia’s military to begin new drills on the two nations’ border.
The reach of sanctions used so far on the financial industry was demonstrated when the U.S. designated OAO Bank Rossiya, leading Visa Inc. and MasterCard Inc. to cut services for the St. Petersburg-based lender.
Herman Gref, the chief executive officer of Russia’s largest lender OAO Sberbank, told reporters on April 16 he sees no reason for sanctions against him or the company.
Gazprombank, started in 1990 as an institution focused on OAO Gazprom, the Russian natural gas export monopoly, has grown to serving more than 45,000 companies. Gazprom retains a 36 percent stake in the lender.
Gazprombank withdrew its application for a U.K. investment bank license after the Financial Services Authority, the former regulator, indicated that it wouldn’t grant authorization without more information about its shareholders, a person with knowledge of the plans said in November 2012.
VEB, with assets valued at $83 billion, or about 4 percent of Russia’s economic output, was the government’s bailout manager in 2008-2009 when it rescued troubled companies and bought domestic securities to support financial markets.
The bank, which owns 10.2 percent of Gazprombank, lent $7.4 billion to Russian industrialists to help finance construction for this year’s Sochi Winter Olympics. In December, VEB extended the grace period for 241 billion rubles ($6.7 billion) of loans for 20 Olympic projects by two years to the end of 2015. The biggest credit, 73 billion rubles, went to billionaire Vladimir Potanin’s development company.
Senator Bob Corker of Tennessee, the ranking Republican on the U.S. Senate’s Foreign Relations Committee who is visiting Ukraine this week, urged sanctions on Gazprom and Russian banks to ramp up the pressure on Putin.
While the administration has prepared a range of next steps, U.S. officials say sanctions on individuals or institutions, rather than on entire Russian industries, are the next step.
“The U.S. is interested in getting the biggest bang for the buck from sanctions, going for targets where the economic interests of Putin’s closest advisers are most concentrated,” William Browder, the founder of Hermitage Capital Management Ltd., said by phone on April 23. “Targeting Gazprombank would be disruptive for Putin’s friends.”