By CHRISTOPHER WHITTALL and ANDREY OSTROUKH
European banks join U.S. peers in shunning potential
$3 billion deal
The Russian government is struggling to find major
global banks to help it sell $3 billion worth of sovereign bonds, putting into
question Moscow’s return to capital markets after a near three-year absence.
Many European banks have ruled themselves out of
participating in a bond sale, unwilling to upset U.S. and European authorities,
who have imposed sanctions on a range of Russian companies and individuals. The U.S. government has already warned off some top U.S. banks.
That leaves Russia mainly reliant on local and Chinese
banks to get the deal done. But these banks may not have the international
reach to sell Moscow’s first foreign deal since sanctions were imposed
following Russia’s annexation of Crimea in 2014. Russian officials have said
that European banks are crucial for the sale.
The sanctions don’t explicitly prohibit banks from
handling bond sales for the Russian government or investors from buying these
securities. But the U.S. and the EU are concerned that Moscow could funnel
money raised to sanctioned companies, and they have let banks know that, people
familiar with the matter said.
Some investors are also wary of buying a potential
bond deal for the same reason.
“Nobody wants
to do something that could be seen to be outside the spirit of the sanctions,”
said Paul McNamara, a fund manager at GAM Holding AG.
Russia invited banks from the U.S., Europe and China
to pitch for the potential $3 billion bond deal.
The EU has not banned banks from participating in the
deal, but it has told bankers to ensure the proceeds of any deal don’t end up
in the hands of sanctioned companies, according to people familiar with the
matter.
“Any bank would need to be mindful and exercise due
diligence” to guard against this, an EU official said in a statement.
European banks are also concerned about angering the
U.S., which in recent years has levied billions of dollars of fines against
European lenders, including BNP Paribas SAand HSBC Holdings PLC, for breaching sanctions.
BNP Paribas, Credit Suisse
Group AG,Deutsche Bank AG, HSBC and UBS
Group AG have decided not to underwrite Russia’s bonds, according to people
familiar with the matter.
U.S. lenders Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Morgan Stanley and Wells Fargo & Co. are also steering clear, according to
people familiar with the matter.
Some European lenders haven’t ruled out doing the
deal, including Italy’s UniCredit SpA and France’s Société
Générale SA, according to people familiar with the matter.
Société Générale, which owns Rosbank, one of Russia’ major privately owned
banks, declined to comment.
Svetlana Nikitina, an adviser to Russian Finance
Minister Anton Siluanov, said earlier this month that around half of
the 28 banks it asked to pitch for the deal have responded to the offer.
The banks in talks with Russia are asking that the
bond not be denominated in dollars, one Moscow-based banker close to the deal
said. That could crimp the total amount of money Moscow could raise, investors
say.
If the bond is denominated in dollars then its
settlement will have to go through the U.S., which could present problems for
banks working on the deal, this person said.
A final decision on which banks will be hired is
expected by the end of this week or as early as next week, according to a
Russian government official.
As well as Russian banks, Chinese banks will be among
the main organizers of the deal, but Moscow would still like Europeans to take
part in the deal, the government official and the Moscow-based banker said.
Chinese banks are beefing up overseas in a reflection
of the country’s bigger international clout, but have yet to make major inroads
into European and U.S. capital markets.
But one of China’s four largest state-run banks
declined to pitch out of concern it didn’t have sufficient distribution
capabilities in Europe to handle the sale and wasn’t sure such a deal would
pass muster in Beijing, according to a Europe-based banker at the firm in
question.
For investors, one potential concern is that it might
be hard to sell the bonds on the secondary market without major trading houses
standing ready to match buyers and sellers of these securities.
Still, some potential buyers aren’t deterred by
sanctions.
“We’re free to do whatever we want. The Russian
Federation is not a sanctioned entity,” said Edwin Gutierrez, head of
emerging-market sovereign debt at Aberdeen Asset Management.
That said, even if buying Russian bonds is possible,
it’s not necessarily an easy sell. Mr. Gutierrez says he doesn’t see much value
in Russian bonds following a sharp rally last year.
Russia’s real gross domestic product fell 3.7% in 2015
and is expected to drop further this year. Facing shortfalls in the budget, the
finance ministry has cut spending and is now seeking to borrow abroad.
“The real economy is still going to be in recession
this year. It’s going to be a very tough environment,” said Yerlan
Syzdykov, head of emerging-market bonds at Pioneer Investments.
Write to Christopher Whittall at christopher.whittall@wsj.com and Andrey Ostroukh at andrey.ostroukh@wsj.com
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