• U.S., EU warned banks on risks of participation in offering
  • Russia is seen offsetting funding shortfall with domestic debt

Russia is shelving plans to issue Eurobonds this year in the face of U.S. and European Union sanctions and informal pressure on major banks not to participate, two senior officials said.

While Finance Minister Anton Siluanov said over the weekend that the government “isn’t closing the window of possibility to sell them,” the officials said it’s now clear that the government won’t find sufficiently prominent banks willing to underwrite the bonds in the current climate. That will make it impossible to ensure adequate demand among the high-quality investors Russia was seeking, according to the officials, who spoke on condition of anonymity given the sensitivity of the issue.

Even lining up the participation of clearing services such as Euroclear Bank SA -- a usually routine step that’s vital to attracting many large international investors -- had become a problem amid concerns about sanctions, one of the senior officials said. Euroclear declined to comment on the issue.

The failure of a sale is adding to the Kremlin’s difficulties covering a widening budget deficit. Without the option of the Eurobond, the Finance Ministry will have to increase domestic borrowing and rely more heavily on planned privatizations and dividends from state companies to cover the budget gap, which this year is expected to be the widest since 2010, the officials said. Russia’s hopes of a deal among oil producers to freeze output and support prices were dashed at a meeting over the weekend in Doha, Qatar, adding to the pressure on the budget, which is based on crude at $50 a barrel.

‘Not Apocalyptic’

“It means that they’d be giving up on attempting to source money abroad, which in itself is negative, over and above the additional supply” of domestic bonds that will probably be issued to make up the shortfall, said London-based money manager Paul McNamara, who helps oversee about $4.5 billion of assets at GAM UK. He added that shelving the Eurobond would be “bad news but not apocalyptic,” given planned budget tightening, as well as low government-debt levels and falling inflation.

The planned $3 billion bond would have covered about a tenth of the deficit this year. Still, the failure to place it would be a symbolic setback for the Finance Ministry, officials said. The ministry had hoped that signs early this year that some European countries were eager to ease sanctions, as well as growing indications of interest from western investors in Russian debt, meant that there could be a window of opportunity to place more bonds, one senior official said.

U.S. Warning

But the U.S. told banks that participating would run counter to U.S. foreign policy. The EU warned lenders that helping in the issue could run afoul of sanctions, since while the Russian government itself isn’t subject to the limits, the proceeds of the bonds might wind up with sanctioned entities like state banks. As a result, major U.S. and European banks declined to participate or raised conditions unacceptable to the ministry, bankers and government officials have said.

To be sure, a sudden drop in the tensions with the U.S. and EU, as well as signs of easing sanctions, could lead the government to revisit the issue in the autumn, the senior officials said. That is a remote prospect now.

Banks ‘Refused’

Russia considered a variety of ways around the U.S. and EU limits in recent months, including issues in Swiss Francs or yen, but didn’t find enough banks and investors willing to participate amid fears about sanctions, the officials said.

“Many banks have refused,” Siluanov told reporters over the weekend in Washington. “If we do go out to the market, we will do it only on the same terms and with the same quality of investors” as past issues, he said. “Otherwise, there’s no point.”

Russia’s September 2023 Eurobond fell for a third day on Monday, lifting the yield two basis points to 3.97 percent, the highest in a week. The yield on the notes has fallen 65 basis points since the start of the year and touched a record-low 3.90 percent on April 13.

The Eurobond would have been Russia’s first new issue since 2013. Since sanctions were imposed a year later, a sale would have had more symbolic significance in showing the government could access markets despite the western limits than fiscal benefit, the officials said.

China Difficulties

“This shows that there’s no reason to expect any improvement in borrowing conditions on foreign markets,” said Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow. “It’s more a signal to the market than a substantial change in the budget situation.”

Last year, the Finance Ministry had been optimistic that it could raise much of the $3 billion from Chinese investors. But those plans ran into regulatory hurdles and weak demand in China, officials said, and aren’t likely to happen this year.

Russia’s plans to raise billions through privatizations this year have also run into slack demand and concerns among foreign banks about advising on the deals, according to the 
officials.

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