When the US and EU sanctions due to Russia’s annexation of the Crimea region in Ukraine were unveiled in 2014, a slew of Russian state-owned companies were put on lists of sanctioned entities and restricted from raising capital markets funding.
That list included banks such as Vnesheconombank, Sberbank, VTB and Gazprombank, as well as corporates such as Rosneft and Gazpromneft. Russia’s sovereign was not on it.
At the time, commentators took this as a sign that the EU and US wanted to hamper the smooth running of the Russian economy but not cripple it. They also took it as a sign that while diplomatic relations between Russia and the West were tense, no one was willing to torch unnecessary bridges.
This year, the same sanctions are still in place and the Russian sovereign has, largely by choice rather than because of lack of investor appetite, attempted an international bond market outing since 2013.
But in 2016, the Russian sovereign has released an RFP to banks and is making noises about returning to the international bond markets for a deal of around $3bn in total.
Following the RFP, US authorities reportedly began cautioning its banks against helping to raise money for the sovereign for fear that any dollars raised could be on-lent to sanctioned entities. This week the EU seems to have followed suit. The rule seems to be that the Russian sovereign is allowed to raise money in international markets, only for as long as it does not want to.
It is virtually impossible to track the use of proceeds of a bond for any sovereign, so it is an easy way to bring the banks to heel, even if it is in practice unlikely Russia will pass the proceeds to sanctioned entities. Before 2014, Russia was regularly raising around $7bn per year in the international bond markets, while the sanctioned entities were funding themselves. So a $3bn deal won’t leave Russia overflowing with dollars to pass on.
Perhaps the US and EU are concerned about the potential for their own embarrassment if a Russian sovereign bond happens and the Russian government wants to make it public that sanctions have not stopped them raising funding. Though two years into the sanctions seems a strange time to make the point.
There might be strong diplomatic reasons for the EU and US to keep the sovereign off the sanctions list at this point. But so far, conversations with banks and public comments about the concerns around use of proceeds are making it clear that these authorities are not happy with Russia being back. If this is enough to stop the Western banks in their tracks, what is the difference?
If the Russian sovereign simply asks Russian banks to sell the bond, is it enough to stop western investors buying it? And should it be?
In an era where banks have paid huge fines for breaching sanctions, it is the duty of the regulators to make it clear what is legal and what is not.
Keeping Russia out of official sanctions, but still trying to restrict its access to the markets, is confusing to banks and investors and opens up a grey area ripe for misinterpretation.
The EU and US should sanction Russia or let it raise the bond.