John Kerry Threatens US Banks Over Russia Bond Sale

Tyler Durden's picture

Russia wants to sell some bonds and President Obama isn’t happy about it.

Moscow is looking to issue “at least” $3 billion of foreign bonds in what amounts to the country’s first international issuance since the West imposed sanctions on The Kremlin in 2014 after the annexation of Crimea and Russia’s alleged role in “destabilizing” Ukraine (because it was very “stable” before).

Since the sanctions were imposed, relations between Moscow and Washington have only gotten more contentious and when Russia began flying combat missions from Latakia on September 30, it was trotted out as evidence that Vladimir Putin is indeed determined to reassert Russian influence by sheer force.

Meanwhile, the Russian economy is in trouble. Granted, Russia isn’t Brazil and Moscow isn’t running a double-digit budget deficit like Riyadh, but times are most assuredly tough. The ruble has plunged through 75 and will probably see the mid-80s if oil spends too much time in the 20s, inflation is running high, and collapsing crude threatens to weaken Moscow’s fiscal position.

All of that is just fine with Washington and its European allies who attribute a large part of the malaise to sanctions even though slumping crude probably plays a larger role.

It’s against this backdrop that Russia is set to sell $3 billion in debt and officials in the State Department and the Treasury are out warning US banks not to underwrite the deal. “The U.S. government has warned some top U.S. banks not to bid on a potentially lucrative but politically risky Russian bond deal, saying it would undermine international sanctions on Moscow,” WSJ reports, adding that “the rules don’t explicitly prohibit banks from pursuing the business, but U.S. State Department officials hold the view that helping finance Russia would run counter to American foreign policy.”

Russia has invited BofA, Citi, Goldman, JPMorgan, and Morgan Stanley to bid on the business, but Washington’s threats have left the Street in a rather tenuous position. In response to banks’ inquiries as to whether they are allowed to participate, John Kerry’s State Department said this: “It is essential that private companies—in the U.S., EU and around the world—understand that Russia will remain a high-risk market so long as its actions to destabilize Ukraine continue. [There will be] reputational risks of returning to business as usual with Russia.”

“Business as usual” was tens of billions in sovereign issuance and hundreds of millions in investment banking business for US financial institutions.

By warning of "reputational risks" it certainly appears as though Washinton is threatening to ostracize banks that help to arrange deals for the Russian government. Here's Moscow's sharp-tongued foreign ministry spokeswoman Maria Zakharova: "The US is trying to intimidate banks on our bonds."

The worry, apparently, is that The Kremlin will channel the funds to companies currently under sanctions meaning banks "could run the risk of inadvertently violating the sanctions in spirit." We're not entirely sure the best way to promote global security is to forcibly compel banks to help freeze the Russians out of international debt markets at a time when the fate of international peace is effectively in Russian hands thanks to Putin's intervention in Syria.

We're also not entirely sure why the federal government feels like it has the right to dictate with whom private enterprises can do business. Besides, if John Kerry is really interested in curtailing the financial activities of nefarious actors, he should be warning the Russians not to do business with Wall Street - the bankers are much more dangerous than Vladimir Putin.