Russia Loses Buyside Support for Eurobond After Banks Balk

  • Union restricted from buying bonds from sanctioned brokers
  • Reputational risk of deal is making funds wary: Allianz

Russia’s attempt to return to global capital markets under sanctions is meeting resistance from the last place Finance Minister Anton Siluanov expected: Eurobond investors.

Europe’s biggest bondholders are being told by internal risk managers to avoid a new debt issue after regulators in the U.S. and European Union warned foreign banks off helping Russia sell its first Eurobond since 2013. Just like prospective underwriters for the new securities, money managers at Germany’s Allianz Global Investors Europe GmbH, Union Investment Privatfonds GmbH and Deka Investment GmbH are wary of coming to the attention of U.S. and EU regulators for the wrong reasons.

“The Finance Ministry is in a really tough spot,” said Dmitri Barinov, a money manager who runs $2.6 billion of assets at Union in Frankfurt. He said his compliance department has banned him from buying bonds sold by brokers listed under sanctions. “I don’t think they expected to see such a push back.”

Rather than heal the rift that’s opened with the U.S. and Europe over Russia’s annexation of Crimea in 2014, the bid to tap foreign capital markets and its rebuff highlights the country’s isolation.

Goldman Sachs Group Inc. and at least five other American lenders approached by Russia last month dropped out of the bidding process after the U.S. government told them that participating in a bond sale would run counter to foreign policy, while the EU warned banks to be “mindful” of the indirect risks of violating the bloc’s sanctions. That raises the prospect that sanctioned Russian state lenders would be left to organize the sale.

Reputational Risk

“Many European, many American banks in the low-yield environment of the European and U.S. markets are very happy to have looked and continue looking at our debt instruments,” Siluanov said during a lecture at a university in Moscow on March 17. “Russia with its low debt level and rather predictable economic policy looks attractive among emerging markets.”

Russia’s $3 billion of notes due 2042 have gained 2.8 percent in March, beating the 2.2 percent average return for peers in the Bank of America Merrill Lynch Emerging Markets External Debt Sovereign Index.

Pressure from the U.S. government “is reason enough to put compliance departments on call about any reputational risk of going against the grain," said Greg Saichin, the chief investment officer for emerging-market fixed income at Allianz in London. “Compliance departments are generally conservative.”

Index Funds

Even if major bond index providers, like JPMorgan Chase & Co. or Bank of America Corp. add the new Russian Eurobonds to their emerging market gauges, inflows would be minimal, according to Kapital Asset Management. Inclusion wouldn’t help the sale because it typically happens weeks later, AO Raiffeisenbank said.

“Relative to other Russian bonds in the index, the weighting of the new issue would be small and an index inclusion definitely won’t drive major inflows,” Andres Vallejo, who helps manage the equivalent of $2.6 billion at Kapital in Moscow, said by phone. “Plus, funds that track indexes buy assets and hold them, so this wouldn’t help liquidity either."

The Russian Finance Ministry in February invited more than 25 banks from nine countries to organize the issue of a $3 billion Eurobond. 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, foreign governments are concerned the funds will be used to support sanctioned companies.

“It is not only that your internal compliance may restrict the purchase due to the cash flows mentioned, but what if the U.S. investigates this issue,” said Peter Schottmueller, the head of emerging-market and international fixed income at Deka in Frankfurt. “I think it is not worth the risk."

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