• Russia still talking to Euroclear to allay settlement concern
  • Secondary-market appetite may pave way for a follow-up sale

The chief of Russia’s state-appointed bond organizer blamed political interference from the U.S. and Europe for curtailing demand for the government’s first bond sale since being hit with sanctions two years ago.

Foreign investors including Aberdeen Asset Management Plc and Allianz Global Investors Europe GmbH in London decided not to buy the bonds due to concerns they would struggle to trade the debt because the deal isn’t eligible for settlement on Euroclear Bank SA, the main depository for the Eurobond market. The $1.75 billion bond sale compares with a budgeted $3 billion of foreign issuance this year.

Andrey Kostin
Andrey Kostin
Photographer Simon Dawson/Bloomberg

“The problem is the same for everybody,” Andrey Kostin, the chief executive officer of VTB Group, the parent of underwriter VTB Capital, said in an interview with Bloomberg TV on Wednesday. “There is great political pressure on financial institutions in America and Europe.”

VTB was forced to organize the issue without any help from international underwriters after the U.S. and European Union thwarted Russia’s attempt to hire banks including Goldman Sachs Group Inc. and Deutsche Bank AG to manage the sale in February. While VTB is still in talks with Euroclear, the securities at this stage can only be settled through Russia’s own depository system, Kostin said.

‘Don’t Understand’

Under penalties imposed over the conflict in Ukraine in 2014, many state companies are barred from tapping foreign capital markets, yet the government itself is exempt. The warnings from bodies including the U.S. State Department to the group of banks who regularly worked with Russia before international sanctions has had “a very negative effect” on its advisers, he said.

“We don’t understand it because the issuance or the placement of a sovereign bond is not subject to sanctions,” Kostin said. “We will continue discussions with Euroclear and maybe we can use their services at a later stage.”

For more background on Russia’s first bond sale under sanctions, click here.

The main buyers were from Great Britain, the head of the Finance Ministry’s debt department said. More than 70 percent was placed with foreign investors after the domestic participation was capped at no more than 30 percent, Kostin said. Russia may consider tapping Eurobonds again if it sees follow-up demand in the secondary market, he said.

“We expect that there will be good secondary-market demand for the paper, which may allow us to make an additional placement if the Ministry of Finance is interested during this year,” Kostin said. The ministry is acting as the paying agent on this week’s new sale.

The U.S. and EU warned banks that the deal could indirectly breach sanctions based on where the proceeds were channeled. Russia’s bond prospectus contains an assurance that funds raised in the sale will supplement reserves and not be diverted to any blacklisted companies.

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