News / Economy

Legal Minefield of Russia Sanctions Worries Bond Investors

An employee speaks on the phone at the office of the Moscow Exchange, Russia's main venue for trading in stocks, bonds, foreign exchange and derivatives, January 21, 2013.
An employee speaks on the phone at the office of the Moscow Exchange, Russia's main venue for trading in stocks, bonds, foreign exchange and derivatives, January 21, 2013.
Reuters
Confusion over the legal implications of sanctions on Russia and worries about further, harsher restrictions from the West are making investors cautious about owning bonds issued by Russian companies.
 
Two rounds of U.S. sanctions on Russian individuals and companies, in March and April, have not directly affected any companies which issue publicly traded debt. EU sanctions are regarded as even lighter.
 
Sanctions imposed so far on individuals such as Igor Sechin, chief executive of Rosneft, do not directly target the company, because Sechin does not own a controlling stake in the firm.
 
But worries about how the sanctions might be implemented have triggered a selloff in the debt of Rosneft as well as that of Novatek and Russian Railways, where sanctioned individuals hold non-controlling stakes.
 
The risks of sanctions-busting are at the front of investors' minds, with French bank BNP Paribas under investigation in the United States over sanctions violations.
 
And even while investors fret about how to treat existing sanctions, U.S. Republican lawmakers have called for tighter sanctions on Russian firms. These include frequent borrowers in global markets - Sberbank, VTB Bank, VEB Bank, Gazprom and Rosneft.
 
This measure is expected to go nowhere in the Democrat-controlled Senate. But the Obama administration too is working on new sanctions that would be imposed on Russia if it dramatically ramped up aggression against Ukraine, U.S. officials said this week.
 
And in the post-financial crisis world, as regulators sharpen their teeth, investors feel they cannot be too careful.
 
“There is caution among financial institutions - many want to be transparently compliant, with banks having been caught out for things like money laundering,” said Andrew Carey, capital markets partner at law firm Hogan Lovells. “There may have been a time when they would have shrugged it off.”
 
Analysts speculate that sanction worries were behind U.S. export credit agency Ex-Im Bank's decision to pull out of Russia's $27 billion Yamal liquefied natural gas project, headed by Novatek. Sanctioned billionaire Gennady Timchenko owns 23 percent of Novatek via his investment vehicle Volga Resources. Ex-Im has said it suspended consideration of the Yamal LNG application in March.
 
Lawyers warn that the U.S. Office of Foreign Asset Control, responsible for U.S. sanctions, is eager to avoid investors exploiting any loopholes.
 
“Even in situations where the sanctioned person has an ownership interest in the joint venture of less than 50 percent, but that interest is nonetheless considered to be significant, the U.S. Office of Foreign Asset Control advises counterparties to exercise caution when dealing with such entities,” lawyers from Eversheds said in a briefing note.
 
“The same is likely to be true in respect of EU sanctions.”
 
Assets or liabilities
 
Analysts and lawyers say the question is not only whether companies with outstanding debt will be hit in any future sanction rounds, but also the form the measures could take.
 
If sanctions only target a company's assets, existing bonds should be safe as they are classed as liabilities. Investors who trade the bonds are not doing so directly with the company concerned.
 
However, such sanctions would still stop the company from being able to sell new debt.
 
If both assets and liabilities of a company are targeted, trade in existing bonds would be frozen.
 
“Historically, sanctions have targeted both assets and liabilities, but more recently it's just been assets,” said one analyst who declined to be named because he did not have authorization to speak to the media on this topic.
 
If assets alone are targeted, sanctions would be unlikely to trigger default, lawyers added.
 
There has also been confusion among investors about the possible impact of U.S. sanctions on a company, even where the European Commission does not impose sanctions.
 
Analysts and lawyers say that any financial firm with U.S. connections, or U.S. employees of that firm, would not be able to do business with the sanctioned company.
 
It is a similar situation to Cuba, which is subject to U.S. sanctions but not to European sanctions - many investors avoid Cuban debt to be on the safe side.
 
Cuban debt, however, only amounts to a few billion dollars, compared with $650 billion in Russian corporate debt.
 
There is also a worry that the payment agent on a Russian bond, usually a U.S. bank, would be prevented from paying out the coupons on the debt of a sanctioned Russian company.
 
The extent to which the ramifications of sanctions could run through the financial system is unclear.
 
“It's not unreasonable to expect the companies would have problems making payments,” said Andrew Burge, partner with law firm Linklaters in Moscow.
 
“The financial system could freeze up on them - payment agents, clearing systems and correspondent banks.”
 
However, others said payment agents would only be affected if this role was specifically named in sanctions.
 
Iran
 
U.S. sanctions also exist on North Korea, Syria and Sudan as well as Cuba, and there have been sanctions in the recent past on countries including Iran, Iraq, Libya and Ivory Coast.
 
But analysts say the case of Russia is different, as it is a far larger economy - one of the BRIC emerging market powerhouses - and is more closely linked to the world economy.
 
TD Securities puts the world's exposure to Russia at $1 trillion, including trade and financial links.
 
Sanctions have also generally focused on governments, rather than individual companies.
 
Analysts at Bank of America-Merrill Lynch, however, say that the situation with Iran, which has won limited relief from western sanctions after agreeing to curtail its nuclear activities, shows that sanctions can easily escalate.
 
“Sanctions have tended to be gradually imposed, becoming more severe and wide-ranging over time, as seen with the implementation of the Iranian sanctions,” they wrote in a note.
 
But sanctions will not be as far-reaching as those on Iran, the analysts reckon, adding: “The likelihood of the extreme sanctions scenario is quite low, given the detrimentally high costs that all sides would incur.”
 
Investors also see deeper sanctions as unlikely, due to Russia's role in the world economy, particularly via its energy companies.
 
Some think the risks are already priced in.
 
Steve Ellis, emerging market portfolio manager at Fidelity Worldwide Investments, finds Russian corporate debt attractive.
 
“We like bonds in Gazprom and Sberbank, we think those kind of companies carry a tremendous risk premium.”

You May Like

Video Iran Nuclear Deal Becomes US Campaign Issue

Voters in three crucial battleground states - Florida, Ohio and Pennsylvania - overwhelmingly oppose nuclear deal with Iran More

With IS in Coalition Cross-Hairs, al-Qaida's Syria Affiliate Reemerges

Jabhat al-Nusra has rebounded, increasingly casting itself as a critical player in battle for Syria’s future More

Lessons Learned From Katrina, 10 Years Later

FEMA chief Craig Fugate says key changes include better preparation, improved coordination among state, federal assistance agencies More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Colombians Flee Venezuela as Border Crisis Escalatesi
X
August 27, 2015 2:08 AM
Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Colombians Flee Venezuela as Border Crisis Escalates

Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Is China's Economic Data Accurate?

Some investors say China's wild stock market gyrations have been made worse by worries about the reliability of that nation's economic data. And some critics say the reports can mislead investors by painting an unrealistically-strong picture of the economy. A key China scholar says Beijing is not fudging ((manipulating)) the numbers, but that the economy is evolving quickly from smoke-stack industries to services, and the ways of tracking new economic activity are falling behind the change. V
Video

Video Next to Iran, Climate at Forefront of Obama Agenda

President Barack Obama this week announced new initiatives aimed at making it easier for Americans to access renewable energy sources such as solar and wind. Obama is not slowing down when it comes to pushing through climate change measures, an issue he says is the greatest threat to the country’s national security. VOA correspondent Aru Pande has more from the White House.
Video

Video Shipping Containers Provide Experimental Housing

Housing prices around the San Francisco Bay area are out of reach for many people, so some young entrepreneurs, artists and tech industry workers are creating their own houses using converted shipping containers. But as VOA's Mike O’Sullivan reports from Oakland, the effort requires ingenuity and dealing with restrictive local laws.
Video

Video Arctic Draws International Competition for Oil

A new geopolitical “Great Game” is underway in earth’s northernmost region, the Arctic, where Russia has claimed a large area for resource development and President Barack Obama recently approved Shell Oil Company’s test-drilling project in an area under U.S. control. Greg Flakus reports.
Video

Video Philippine Maritime Police: Chinese Fishermen a Threat to Country’s Security

China and the Philippines both claim maritime rights in the South China Sea.  That includes the right to fish in those waters. Jason Strother reports on how the Philippines is catching Chinese nationals it says are illegal poachers. He has the story from Palawan province.
Video

Video Technique May Eliminate Drill-and-Fill Dental Care

Many people dread visiting dentists because they're afraid of drills. Now, however, a technology developed by a British firm promises to eliminate the need for mechanical cleaning of dental cavities by speeding a natural process of tooth repair. VOA’s George Putic reports.
Video

Video China's Spratly Island Building Said to Light Up the Night 'Like A City'

Southeast Asian countries claim China has illegally seized territory in the Spratly islands. It is especially a concern for a Philippine mayor who says Beijing is occupying parts of his municipality. Jason Strother reports from the capital of Palawan province, Puerto Princesa.
Video

Video Ages-old Ice Reveals Secrets of Climate Change

Ice caps don't just exist at the world's poles. There are also tropical ice caps, and the largest sits atop the Peruvian Andes - but it is melting, quickly, and may be gone within the next 20 years. George Putic reports scientists are now rushing to take samples to get at the valuable information about climate change locked in the ice.
Video

Video French Experiment in Integrating Roma Under Threat

Plans to destroy France’s oldest slum have sparked an outcry on the part of its Roma residents. As Lisa Bryant reports from the Paris suburb of La Courneuve, rights groups argue the community is a fledgling experiment on integrating Roma who are often outcasts in many parts of Europe.
Video

Video Kenyans Turn to Agriculture for Business

Each year Kenyan universities continue to churn out graduates for the job market despite the already existing high rate of unemployment among youth in the country. Some of these young men and women have realized that agriculture can be as rewarding as any other business or job, and they are resorting to agribusiness in large numbers as a way of tackling unemployment. Rael Ombuor reports for VOA.
Video

Video First Women Graduate Elite Army Ranger School

Two women are making history for the U.S. Army by proving they are among the toughest of the tough. VOA's Carla Babb reports from Fort Benning, Georgia as 94 men and those two women rise as graduates of the difficult Ranger school.

VOA Blogs

World Currencies

EUR
USD
0.8770
JPY
USD
119.68
GBP
USD
0.6414
CAD
USD
1.3265
INR
USD
66.194

Rates may not be current.