U.S. Said to Discourage Banks From Helping Russia Sell Debt

  • Aiding sale said to be seen as counter to U.S. foreign policy
  • Many banks didn't respond to Russia Eurobond letter: Storchak

The U.S. government has urged some of the nation’s largest banks to refrain from helping Russia sell bonds, according to people with knowledge of the situation, as helping the nation obtain foreign funding risks undermining sanctions imposed over the Ukraine conflict.

The State Department and Treasury Department told banks this month that participating in a bond sale would run counter to U.S. foreign policy, even if it’s not explicitly barred by sanctions, said the people, asking not to be identified because the talks were private. “Many” banks didn’t respond to the Russian Finance Ministry’s call for proposal to organize the sovereign Eurobond sale, which means they won’t be participating, Russian Deputy Finance Minister Sergey Storchak told reporters Thursday.

Russia has contacted 25 banks around the world as it looks to return to foreign debt markets for the first time since 2013. Months after selling bonds that year, President Vladimir Putin’s annexation of Crimea triggered sanctions from the U.S. and European Union that virtually closed the Eurobond market to Russian borrowers. A funding crunch and the widest budget shortfall in five years are adding urgency to the need to shore up public finances hobbled by oil’s collapse to the lowest in more than 12 years.

“We continue to be clear in our engagements with U.S. companies that we believe there are risks -- both economic and reputational -- associated with a return to business as usual with Russia,” the State Department said Wednesday in a statement that didn’t elaborate on the specific conversations with banks. “It is essential that private companies -- in the U.S., EU, and around the world -- understand that Russia will remain a high-risk market so long as its actions to destabilize Ukraine continue.”

Some Refraining

Banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. are evaluating the situation, the Wall Street Journal wrote in a report on the talks earlier Wednesday. Spokesmen for both firms declined to comment. Citigroup Inc. is among lenders that have decided to refrain from participating, a person with knowledge of the situation said.

Storchak declined to say how many banks failed to respond to Russia’s call for Eurobond proposals.“We have banks to choose from,” he said.

Russia, mired in a recession amid record-low oil prices and a widening deficit, has budgeted for a placement of as much as $3 billion in Eurobonds this year. While the government itself wasn’t sanctioned, penalties have targeted corporations and individuals.

“If the Russian sovereign gets away with borrowing through the Eurobond market, it would in effect blow a huge hole in the Western sanctions program as the sovereign could then borrow on behalf of other Russian entities, filtering the money down to lower level entities,” Timothy Ash, head of emerging-market strategy at Nomura International Plc in London, said by e-mail. “The U.S. Treasury had to act, and I doubt any U.S. entity would now risk the reputational damage by getting involved in such a deal."

It’s not the first time U.S. banks, which once looked to Russia for international growth, have been caught in the middle amid the tensions. Their anti-money-laundering controls have faced heightened pressure to scrutinize transactions to ensure money flows comply with the sanctions. In 2014, Wall Street leaders canceled trips to an economic conference in St. Petersburg amid pressure from the White House on corporate executives to spurn Putin.

Russia has sent requests for proposals to 25 foreign and three local banks, including the Bank of China, Goldman Sachs Group Inc. and Barclays Plc, according to the Finance Ministry.

Russian lenders include VTB Group, Gazprombank JSC and Sberbank PJSC.
Other banks contacted were BNP Paribas SA, Bank of America Corp., Wells Fargo & Co., Deutsche Bank AG, Industrial and Commercial Bank of China Ltd., Credit Agricole SA, Credit Suisse Group AG, Landesbank Baden-Wuerttemberg, Morgan Stanley, Nomura International Plc, Citigroup Inc, Societe Generale SA, TD Securities Inc, HSBC Holdings Plc, RBC Capital Markets, UBS Group AG, Scotiabank, Mizuho Financial Group Inc., Agricultural Bank of China Ltd., UniCredit Bank AG and China Construction Bank Corp. and JPMorgan Chase & Co., according to the Finance Ministry document.

Investment bank earnings from Russian corporate deals, hit by the sanctions and low oil prices, were the lowest since at least 2002 last year, according to the New York-based consultancy Freeman & Co. Foreign lenders’ market share slipped to less than 50 percent.
As the market has soured, banks including Royal Bank of Scotland Group Plc, Barclays, BNP Paribas and Deutsche Bank are retreating from Russia.

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