Russia Said to Face Eurobond Setback as Many Banks Shun Deal

  • No suitable underwriter has been found, officials say
  • All but two Western banks have avoided the deal, official says

Russia hasn’t been able to line up a suitable lead manager for a planned $3 billion Eurobond because of U.S. and European Union pressure on major banks not to participate, meaning the high-profile sale is likely to be delayed or even shelved, senior officials said.

Only two Western banks are still interested in helping sell the bond, one of the officials said, speaking on condition of anonymity. Another official said Russia so far hasn’t been able to find a bank big enough to successfully lead the issue that would be willing to participate, despite sending out requests for bids to about two dozen major banks earlier this year.

Relying on Russian banks could deter western investors, since the country’s main lenders are subject to U.S. and EU sanctions. Russia isn’t confident that Chinese banks could successfully lead the offering aimed mainly at buyers in Europe and the U.S., the second official said.

Investor Concern

A prominent underwriter is important for the Kremlin but pressure on banks from the U.S. and EU proved stronger than the government expected, the official said. Warnings from the U.S. and EU to lenders to stay away from organizing the deal have also raised concerns among investors about the risk of falling afoul of sanctions if they buy the debt.

The Russian government itself is not subject to sanctions, but the EU earlier this month said banks should be “mindful” of the risks that a bond sale wouldn’t ultimately benefit sanctioned entities, such as state-owned lenders.

“It was to be expected that international banks are refusing to participate in our issue,” said Pavel Medvedev, Russia’s financial ombudsman. “Until we make peace with the rest of the world, no one is going to do us any favors and work with Russia. For banks, this is dangerous -- they could face punishment.”

Facing a sharp drop in budget revenue because of plunging oil prices, Russia is scrambling to find ways to cover a widening budget deficit. In addition to the bond issue, the government is planning to sell stakes in some major state companies and hoping to draw western banks as consultants later this year.

One senior official said the government had been hoping to use the Eurobond sale to show that Russia could still borrow even amid sanctions. In addition, while the $3 billion planned offering would cover only a relatively limited part of the deficit, it would bring much-needed foreign currency, which is in short supply now with export revenue plunging, the official said.

March Deadline

As recently as last week, Finance Minister Anton Siluanov said he was confident there would be strong demand for the Eurobond issue this year. On March 1, department head Konstantin Vyshkovsky said the ministry would chose banks to organize the deal by the end of March, Interfax reported.

That’s now unlikely, according to the officials.

Siluanov said Thursday that there had never been a firm deadline, other than the mandate to go to market before the end of the year.

“We haven’t given up,” Deputy Finance Minister Sergei Storchak told reporters Friday when asked about the sale, refusing to comment further on timing. He noted that domestic borrowing could be increased this year if needed, given strong demand at recent auctions.

“It’s not as though someone has us by the the throat,” he said of the Eurobond issue. “No, We’re calm.”

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