Business is Business: US Megabanks Revive Russian Bond Trading

The Treasury greenlit fiscal maneuvers allowing American bondholders to sell off their Russian bond holdings to non-US persons last month. The measure came following an appeal from investors, who saw their Russian assets put in limbo after US restrictions made it impossible for Russia’s Finance Ministry to pay out dividends in dollars.

US megabanks JP Morgan Chase, Bank of America, Citibank, and Jeffries Group have eagerly moved back into trading Russian bonds previously considered toxic and untouchable after fiscal authorities in Washington softened its restrictions, Bloomberg and Reuters have reported, citing investors and sources in the banking sector.

According to Reuters’ sources, major European banks including Barclays and Deutsche Bank are also getting in on the frenzy.

The megabanks’ approach to working with Russian assets is said to vary, with some offering clients assistance in divesting from Russian bonds, while others provide added services –such as trades for asset disposal.

In a newsletter to investors last week, Bank of America informed customers that it would be facilitating the sale of “Russian sovereign and certain corporate bonds.”

None of the aforementioned banks barring Jeffries commented on their activities, with a Jeffries spokesperson assuring Reuters that the bank was “working within global sanctions guidelines” to facilitate its clients’ needs. A source close to Deutsche Bank said that the financial institution was only working with Russian bonds on a ‘case-by-case basis, and only with the aim of reducing clients’ Russia risk exposure.

The breakthrough comes after months of tightening restrictions against Russian state and corporate banks and all things having to do with Russian finances by Washington and Brussels over Moscow’s military operation in Ukraine, which culminated in a Treasury ban on the purchase of Russian securities on the secondary market on June 6.

The Treasury’s Office for Foreign Assets Control reversed course in July, greenlighting a credit default swaps auction to let investors sell of Russian bond holdings, and issuing a license authorizing transactions through October 20 aimed at ‘winding up’ debt and equity trades made before June 6. These measures prompted the big banks to begin a careful return to the Russian debt markets.

Russia has an estimated $40 billion in outstanding sovereign bonds on the market, with Moscow assuring that all obligations will continue to be paid out on time and in full – but in rubles, instead of dollars or euros, owing to sanctions restrictions on payments involving the greenback and the European currency.

Amid the slew of restrictions, US media reported in June that Russia had technically “defaulted” on its foreign debt after being made unable to pay obligations in dollars, and cited this event as evidence that “sanctions work.” Russian financial officials dismissed the reporting as a “farce,” saying a genuine default comes when a country becomes unable or unwilling to pay its debts, and pointing out that Russian bonds had a built in contingency in case dollar and euro payments were made impossible.

The Russian state has not show signs of approaching default, even after Western countries’ decision to freeze more than $300 billion from Russian emergency reserve cushion assets in March. Thanks to soaring oil and gas revenues (achieved partly through Western restrictions on Russian energy), the Finance Ministry added $3.5 billion to its national wealth fund in April, and another $9.5 billion by June.