According to reports, Moscow is preparing to issue a 10-year Eurobond offering for $3 billion that would represent its first such offering since before the invasion of Ukraine and the annexation of Crimea in 2013. An advisory group of Western banks is being formed to assist with the process.
If oil prices remain low, Russia is likely to face a shortage of hard currency over the next few years, and its ability to tap global markets ‘‘‘ although not an immediate imperative ‘‘‘ will be increasingly essential over time. Its reentry into debt and equity markets, however, will likely need to be accomplished incrementally and, therefore, planned well in advance. The relatively modest amount of this offering is an indicator of Russia seeking to ‘‘‘test the waters‘ and stoke what it hopes will be a divisive debate among Western allies about whether to participate.
The country still faces dire circumstances in its effort to balance the national budget and ensure the liquidity of its key companies and banks. The bailout of faltering VEB bank alone represents a potentially enormous cash drain. Funds raised from this bond offering are likely to be used, at least in part, for purposes like these. The larger benefit, however, is clearly the political symbolism of being accepted ‘‘‘ or even nearly accepted ‘‘‘ back into the global financial markets.
For its part, the U.S. Government has warned U.S. companies against participating in the bond offering. All six U.S. lenders approached by Moscow (Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Wells Fargo and Morgan Stanley) have said that they will refrain from participating. Funds from the bond offering could easily be injected into sanctioned Russian SOEs and individuals, as there are no underlying transactions or projects associated with this financing. Participation of EU banks would likewise be undermining of current sanctions policy, although their reaction (and that of EU political leaders) to this news remains unclear.
This move is clearly an effort by Russia to erode the political will of Western leaders and financial institutions with regard to isolating Russia and to continue enticing business leaders with deals that they would sorely like to take part in (creating a powerful ally in the markets for improved relations between East and West).
Those lenders that received a prospectus for the offering by Russia‘s Finance Ministry include:
- US Lenders: Bank of America Merrill Lynch, Citigroup, Goldman Sachs, JP Morgan Chase, Wells Fargo, Morgan Stanley
- EU Lenders: Barclays, BNP Paribas, Deutsche Bank, Credit Agricole, Credit Suisse, Landesbank Baden Wuerttemberg, Societe Generale, Unicredit, HSBC
- Chinese Lenders: Bank of China (BoC), Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China
- Russian Lenders: Sberbank CIB, Gazprombank
- Other: RBC Capital Markets, UBS, Credit Suisse, Scotiabank, Mizuho Financial, TD Securities, Nomura
Moscow remains optimistic ‘‘‘ for good reason — that European banks will ultimately succumb to the temptation to subscribe to this initial $3 billion Eurobond and even seek a lead role in the financing. They likely also hope that Japanese banks will participate, given the positive direction in bilateral relations with Japan. China will also likely play ball in the context of its broader strategic partnership with Russia. Russia‘s intent regarding this offering is that the participation of each foreign financial institution in this general-purpose, undisciplined financing be leveraged, in effect, as an endorsement of the Kremlin‘s return to good standing in the markets, but also, ultimately, the international community. President Putin is counting on profits trumping principle and allied unity and plans to use this formula as a means of emerging from his recent isolation.