Untouchable debt: Russia will borrow abroad without US banks

From what U.S. authorities have warned their banks?

The U.S. government warned the number of American banks from the placement of Russian sovereign Eurobonds, said Thursday The Wall Street Journal, citing sources familiar with the situation. The recommendation of the American authorities explain the fact that the participation in such transactions is contrary to U.S. foreign policy and international sanctions against Russia, introduced in the summer of 2014, writes the WSJ.

As explained a source close to the Ministry of Finance of the USA, participation in the placement or purchase of the Russian debt is not explicitly forbidden in American law, but the Ministry of Finance considers that there is a risk that the proceeds from the placement funds will be directed to financing of the organizations targeted by the sanctions. For example, last week, Deputy economy Minister Oleg Fomichev said that the financial support of Vnesheconombank (subject to sanctions imposed by the EU and the US) will be provided at the expense of increasing the national debt. Any American company that participates in the placement of Russian securities, must keep in mind that risk, said the source.

The U.S. Treasury Department and the state Department issued a special warning after receiving from banks questions whether they can participate in the placement of Russian bonds, which at the end of January, said the Deputy of the Ministry of Finance of Russia Sergey Storchak. Russia plans to return to the market of external borrowings this year by releasing Eurobonds for $3 billion Such recommendations to the business from the Department of state or the U.S. Treasury are not legally binding, says a lawyer from Washington Kelley Burton Jacobson Doug Jacobson, specializing in American sanctions, but most banks most likely would refuse to participate in the transaction.

Whom Russia invited to place Eurobonds?

In early February, the Russian Finance Ministry has sent 25 foreign banks proposal to become organizers of the placement of Eurobonds in 2016. In the list were seven U.S. banks – Bank of America Merrill Lynch, Wells Fargo, Goldman Sachs, J. P. Morgan, Morgan Stanley, Citigroup and HSBC. Part of the banks US and EU had not responded to the Russian proposal, said Storchak. “Some” banks to the requests answered. We’ve got plenty to choose from in any case”, – he noted.

The last time Russia took on the international markets in September 2013, when he sold the paper for $6 billion maturing in 2019, 2023 and 2043 respectively. Since then, Russia has not appeared on the international capital markets because of Western sanctions imposed after the annexation of Crimea, which effectively closed the country to foreign debt markets. In 2013, the placement was made by the Royal Bank of Scotland, Barclays, Deutsche Bank, VTB, Renaissance Capital and Gazprombank

Will Russia be able to sell bonds without the involvement of the Americans?

If American investors will refuse from participation in the offering and from the purchase of Russian Eurobonds due to political pressure, to sell them would be problematic, says chief economist for Russia and CIS at Renaissance Capital Oleg Kuzmin. “Alternative buyers can be investors from China and South Africa,” he adds.

Chief economist at Alfa Bank Natalia Orlova agrees that the warning of the U.S. government American banks could have a negative impact on the sovereign debt of Russia. “In fact, we see that the sanctions regime is deepening. The market of sovereign borrower, who is not formally under the sanctions, but de facto the US government distributes it to the sanctions regime,” explains Orlova.

Warning American banks by the United States government may be made in connection with the fact that the West is going to toughen sanctions against Russia if the Syrian conflict will inflame with a new force, says chief economist at FG BCS Vladimir Tikhomirov. “We can talk about the ban on the purchase of new issues of sovereign debt of our country. Then the question of placing itself will disappear: international investors will not want to buy such a debt, even if they do not fall under American jurisdiction. For them, U.S. sanctions were a significant limitation,” – says Tikhomirov. The success of placing of the Russian Eurobonds, in his opinion, will largely depend on the situation in Syria.”

Will there be a European power of the American example?

If American banks will refuse to participate in the placement of Russian government debt, European banks may follow their example, because it is a signal to the tightening of the sanctions regime, says Orlov. “Investors from other countries may worry about it even if there is no direct advice from the authorities. Know the precedents when the sanctions States turned around fines,” she adds. Chief expert of Center for economic forecasting Gazprombank Yegor Susin believes that the European authorities will recommend to banks not to participate in the placement of Russian debt. “The European authorities are less centralised, and the attitude to this issue may be different,” says Susin.

How restrictions will affect the financing of the budget deficit?

The Russian authorities are planning a pilot deployment to test the market,and not to involve significant sums, says Susin. Placement of Eurobonds is not able to significantly improve the situation with the budget, agree Kuzmin. “Addressing the budget deficit is reducing costs, resolving the issue with the Reserve Fund, borrowing in the domestic market, etc. hosting play a role, but not the most important,” he says.

If the players refuse to participate in the placing, the Russian authorities will be forced to offer investors higher returns, says Orlov. “Russia now there is no urgent need to enter the external debt market. If yields are unattractive, the authorities will probably postpone the decision on placing of Eurobonds,” she said. Alternative financing of the budget deficit – privatization and placement of internal ruble debt, says Orlov.