Washington is turning American and European banks against Russian bonds
As the Wall Street Journal reported, the U.S. State Department and Treasury have warned a number of top U.S. banks not to bid on Russian bond deals. The newspaper received this information through its own sources. The warning against potentially lucrative deals is motivated by political reasons alone: sanctions against Russia must be kept at any costs, while helping Russia is not in U.S. foreign policy interests.
“It is essential that private companies - in the US, EU and around the world - understand that Russia will remain a high-risk market so long as its actions to destabilize Ukraine continue,” the State Department stated. The department warned of “reputational” risks of returning “to business as usual with Russia.”
As WSJ pointed out, Russia could inject the funds into companies currently under sanctions. Besides, there is a chance that Moscow says the sanctions are meaningless after the sale of bonds, with Washington ending in a foreign policy fiasco. Some bank officials believe they were invited because Moscow wanted to use this loophole against the U.S.
Honey is sweet, but the bee stings
Russia plans to issue $3 billion of foreign bonds, as planned in the country’s budget for 2016. Apparently, investors interested in buying Russian Eurobonds could offer a helping hand to the country’s economy. During this fiscal year, the budget is going to cover deficit of 2.4 trillion rubles, mostly from the Reserve Fund. Besides, the fall in oil prices may cost Russia additional 1.5–2 trillion rubles. Russia last issued foreign bonds in September 2013, when placed four Eurobond tranches for a total of $7 billion.
It is, however, not yet a prohibition, but a strong request. Which, according to WSJ, not all banks are eager to comply with. Legally, participation in the Russian deals won’t run counter the sanctions policy, nor will it follow any penalties for financial-services firms. The country invited 3 Russian and 25 foreign banks to bid on Eurobond deals. The number includes European and Chinese banks as well as ones from the U.S., including Bank of America Corp, Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley, and others. Opinions are divided: bank officials at Citigroup say they won’t participate, while Goldman and J.P. Morgan weigh their options.
“Many banks didn’t give a response. I can’t say the number, but many of them just didn’t react to our offer. That means they won’t participate,” Russian deputy finance minister Sergei Storchak said, adding that some banks responded to the request. “We have something to choose from anyway,” he underlined. Still, the influence of the U.S. recommendation should not be underestimated.
Director of Centre for Monitoring and Regional Studies at the Russian Presidential Academy of National Economy and Public Administration Alexander Savchenko noted that Washington’s warning against Russian Eurobond deals continues the policy of anti-Russian sanctions.
“That was an expected move from Washington. The main goal is to inhibit Russia’s access to the world’s financial resources. First of all, the sanctions influenced the banking sector. Russia attempted to enter the market through another door, but the U.S. continues to interfere”, Savchenko argues.
The expert says, Washington may influence financial-service firms not only in the U.S., but in other countries. The cited above statement by the State Department mentions firms from “the U.S., EU and around the world”.
“For that, the U.S. has levers of influence, tested on troublesome financial institutions of Switzerland and the UK, and now being used everywhere. The threat of cancelling a banking license, prohibiting banks to transmit the U.S. dollars, works very well,” Savchenko says.
The expert notes that Russia’s offer is interesting to foreign banks and having Russian bonds would be an advantage for them.
Not for nothing does WSJ interpret typical U.S. behaviour as a page-oner: the main goal of the State Department’s recommendations, presented as an exclusive story, is to undermine trust for Russia’s financial reliability and to eventually limit the flow of capital to its economy. Junk status given to Russia by the world’s rating agencies are the same story.
Kremlin understands rather well how disputable such stories are. "We have not seen any information; these mass media reports are not based on any formal statements or decisions," Press Spokesman for the President of Russia Dmitry Peskov said.
However, Russia holds a realistic view on the subject and doesn’t count on Eurobonds; moreover, there is a reasonable doubt that this plan will prove successful. Sergei Storchak specified that the country’s ministry of finance doesn’t see way to enter the foreign bond market, when announcing the placement of Eurobonds. On the other hand, recent social studies show that Russians don’t believe foreign investment will help the country out of crisis and count more on their own efforts and internal resources.
Translated by Philipp Chernenko