Goldman Retreat Leaves Russian Bond Comeback at Mercy of Europe

  • Russia has asked 28 banks to submit proposals for Eurobond
  • All six U.S. lenders invited indicated they won't take part

As one U.S. bank after another distances itself from Russia’s attempt to return to global bond markets under sanctions, the focus is turning to whether Moscow can shore up enough European support to avoid scrapping the plan entirely.

All six American lenders approached to submit proposals for Russia’s first Eurobond attempt since relations with the West soured to a post-Cold War low indicated they won’t take part, people familiar with the plans said this week. The participation of the 10 European banks invited, including Deutsche Bank AG and HSBC Holdings Plc, will determine if pricing will be low enough to make it worthwhile, Ashmore Group Plc and Aberdeen Asset Management Plc said.

"If all the European banks with U.S. operations also back off, then Russia will have to think twice about coming to the market," said Viktor Szabo, who helps oversee $11 billion of emerging-market debt at Aberdeen in London. The money manager said he’s reduced his position in Russian foreign bonds recently after prices rallied, but would consider buying the new bond.

Investors are watching for which, if any, European banks step forward after their U.S. peers were warned by the government that participating would run counter to foreign policy. While Russia itself wasn’t subject to the sanctions imposed on some of its biggest companies in response to President Vladimir Putin’s role in the Ukraine crisis, the U.S. advisory represents a red flag for the compliance departments of European lenders with American branches.

Funding Shortfall

Russia’s need for foreign fundraising has become more pronounced as the sovereign faces its widest fiscal shortfall in five years and a recession that isn’t letting up amid the drop in oil, the nation’s main export earner. This year’s budget envisions the country selling $3 billion of Eurobonds.

It wouldn’t be unusual for Russia to sell debt abroad without U.S. underwriters. There were no American managers on its last Eurobond in September 2013, a $6.8 billion offering organized by six local and European lenders. Only Citigroup took part among its U.S. peers in a $7 billion sale a year before that.

Russia invited 10 European banks last month to submit proposals for the possible return, as well as six Asian, three Russian and three Canadian lenders. Spokespeople for HSBC and Deutsche Bank declined to comment, along with those at UBS Group AG and BNP Paribas SA, which were also approached by Moscow.

European Appetite

Investors in Europe have traditionally been more willing to take on Russia risk and this time around would be no different, according to Jan Dehn, the head of research at Ashmore in London, who would "definitely" consider buying any bond that emerges.

Appetite for Russian assets has improved in the past year, especially since a Ukraine cease fire in September that’s largely held ground. Sovereign Eurobonds have handed investors 17 percent returns since this time in 2015, the most among major developing countries.

"Russia’s U.S. investor base has always been fundamentally different from the European investor base as U.S. investors have a political game to play," Dehn said. "There is nothing in the sanctions that prevents Western investors from buying this bond. There will be reluctance from some investors, but less from Europe than the U.S."

Still, Putin’s government will probably opt not to tap debt markets unless spreads are less than 260 basis points above Treasuries, according to Dehn, a level they breached on Friday. He expects Russia will achieve pricing of zero to 10 basis points over existing yields. The yield on bonds maturing in Sept. 2023 declined 10 basis points this week to 4.29 percent.

While the lack of U.S. underwriters won’t be enough to quash Russia’s attempt to raise the cash abroad on its own, if it leads to a broader abstinence for the deal among Western banks, that could undermine investor perceptions, according to GAM UK Ltd.

"If no Western banks take part, it stigmatizes the deal," said Paul McNamara, a money manager who helps oversee $4.3 billion of assets at GAM in London, who would consider investing if it corresponds with internal compliance. "The absence of Western banks would also be seen as an indication" of their reluctance to participate in the secondary-market trading of the bonds, he said.

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