Brussels warns EU banks against Russian bond deal

Brussels is urging European banks to steer clear of Russia’s first sovereign bond issue since the imposition of western sanctions over #Ukraine, creating fresh doubts about the viability of the offering. 

Although the EU’s sanctions do not explicitly prohibit purchases of Russian government debt, EU officials have privately echoed Washington’s warnings that the proceeds from an offering could be misused, according to two people familiar with the guidance. 

If this qualified warning convinces European banks to avoid the sale, Russia could be forced to abandon its first foray into capital markets since the annexation of Crimea in 2014, dealing a financial and political blow to the Kremlin. “It is clear that they don’t want us to take part,” said one banker familiar with the guidance. “We are being discouraged.” 

In spite of the warnings, Russia's deputy finance minister, Sergei Storchak, insisted last month that enough foreign banks were still on board to proceed. Meanwhile, Andrei Belousov, an economic aide to Mr Putin, said he did not expect the Treasury’s campaign to drive up Russia's borrowing costs. 

Moscow has long sought to undermine the west’s sanctions regime by accessing its capital markets while, at the same time, aggravating divisions between member states over the policy.

But there has so far been little shift in a sanctions policy that has enjoyed strong backing from Angela Merkel, the German chancellor. After extended discussions on Monday, EU foreign ministers reaffirmed that relations with Moscow rested on the implementation of the Minsk ceasefire accord in Ukraine. 

Although the mere fact of a debate on Russia alarmed some hawkish member states, only Greece, Hungary and Italy pressed for more flexibility or a softening of the bloc’s response to Russia. That suggests that, unless there is unexpectedly rapid progress in Ukraine’s peace process, the EU is moving towards once again extending existing curbs on Russia’s energy, defence and financials services sectors when the current measures expire in June. 

The bond issuance — expected to come in the form of a $3bn, 10-year eurobond — comes at a time when the government’s finances have been hit by recession and a plunge in world oil prices.

It is a test of the west’s willingness to take a tough line on sanctions grey areas, even as the EU pursues parallel talks with Russia over Syria and Iran. During Monday’s ministerial discussion, Philip Hammond, the British foreign secretary, stressed that sanctions were squeezing Russia by locking it out of capital markets and called on colleagues to maintain a “robust” approach. 

Yet the lack of outright sanctions on the Russian state mean bondholders are unlikely to face trouble from regulators if the money is eventually used to support sanctioned entities, according to bankers and senior European officials. 

In private guidance to banks, EU officials have merely urged the institutions to be mindful of the risks of bonds being used to circumvent sanctions and to take precautions, including insisting on clauses to stop the proceeds being diverted to sanctioned entities. 

An obvious candidate for the funds is Vnesheconombank, the state development bank facing a Rbs1tn hole after a series of politically motivated loans to fund Sochi Olympic construction and the purchase of steel mills in eastern Ukraine went awry. 

Unlike the other giant state lenders under US and EU sanctions, which have seen their dollar deposits rise as the rouble devalues, VEB desperately needs the cash to pay off Rbs200bn in Eurobonds this year. 

Russia’s government is planning to spend Rbs300bn from the national welfare fund, one of Moscow's two reserve funds, to sustain VEB's loan-making abilities, but has yet to indicate how much it will spend on the ailing bank from the budget. 

“This is a blatant attempt to get around the sanctions,” said a senior banker in Moscow. “VEB’s got a trillion-rouble hole — they've got to come up with the money somehow.” Deutsche Bank, HSBC, Credit Suisse, BNP Paribas and Barclays declined to comment on any EU guidance.

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