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Structured Note Sales Linked to Russia Slow to Least This Year

Sales of structured notes tied to the debt of Russian entities slowed in July to the least this year as the U.S. and Europe sought to isolate the country from international markets.

Issuance totaled $39 million compared with $195 million the previous month, according to data compiled by Bloomberg. JPMorgan Chase & Co. sold the last credit-linked note on July 15, one day before the U.S. imposed sanctions on large Russian banks and companies.

The Obama administration, along with the European Union, is responding to Russian President Vladimir Putin’s refusal to end support for separatist rebels in Ukraine. The EU sanctions, which went into effect last week, restrict Russian banks from selling bonds or shares in the region, while U.S. measures prevent companies in the country from accessing U.S. debt markets for medium- and long-term financing.

“The sanctions and, more generally, heightened risk aversion towards financial and commercial trade with Russian entities, have multiple potential negative effects on the economy and the financial sector,” analysts at Moody’s Investors Service wrote in a July 31 report. “The current financial and political tensions and uncertainty about their resolution are likely to lower demand for Russian assets, which would weigh on share prices, raise bond yields and increase downward pressure on the exchange rate.”

JPMorgan’s 7.3 million euros ($9.8 million) of credit-linked notes are tied to the debt of VEB-Leasing OAO, a unit of Vnesheconombank, data compiled by Bloomberg show. The state development bank was added to the EU’s blacklist along with OAO Sberbank, VTB Group and OAO Gazprombank, Russia’ three biggest lenders.

‘Uncharted Territory’

Patrick Burton, a spokesman for JPMorgan in London, declined to comment on the securities.

While credit-linked notes are not covered under the sanctions because they don’t offer companies access to new funding, investors may still be wary of investing in securities tied to Russia, according to Okan Akin a fixed-income analyst at AllianceBernstein Ltd. in London.

“We are in uncharted territories; we haven’t seen sanctions like this to any country that has publicly-traded bonds or equities,” said Akin. “Every day we are seeing new developments and it appears to be getting more and more complicated. Whoever invests in emerging markets has to keep a very close eye on what’s happening.”

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