US and EU regulators have warned banks not to participate in a proposed $3 billion, 10-year Russia Eurobond offering, even if participation will not technically violate US sanctions laws targeting Russia based on its annexation of Crimea and destabilization of eastern Ukraine. Russia reportedly invited European and Chinese banks to bid on the proposed offering, as well as at least six US banks, including Bank of America, Citigroup, Goldman Sachs Group, J.P. Morgan Chase, Morgan Stanley, and Wells Fargo. Russia last issued foreign bonds in September 2013, and no US banks participated in that sale. Russia faces a widening budget deficit as a result of plummeting oil prices and a recession, and the government is unable to fund its stimulus package. Although the offering likely does not violate the letter of the law, the regulators’ warnings serve to further squeeze Russia’s access to Western financial markets.

Authorities

The United States and the European Union have imposed a range of sanctions in response to Russia’s annexation of Crimea and efforts to destabilize Ukraine. Executive Order 13622 authorizes the US Treasury Department to impose “sectoral sanctions” against persons in certain sectors of the Russian economy, including the financial services, energy, metals and mining, engineering, and defense sectors. The US Treasury Department’s Office of Foreign Assets Controls (OFAC) implemented this EO, along with EOs 13660 and 13661, through promulgation of the Ukraine-Related Sanctions Regulations (31 C.F.R. Part 589). The Ukraine Freedom Support Act (Pub. L. 113-272) also codified many aspects of these executive orders and authorizes the imposition of secondary sanctions.

OFAC places entities on the Sectoral Sanctions Identifications List (SSI List) pursuant to industry-specific “directives” that restrict the types of transactions US persons can undertake with them. Directive 1, which pertains to the Russian financial sector, restricts certain transactions related to new debt and new equity issued by listed entities. The restrictions prohibit US persons from transacting in new debt with greater than thirty day’s maturity and new equity of entities identified on the SSI List under Directive 1 and entities they own 50 percent or more. On July 16, 2014, OFAC added several Russian financial sector entities to the SSI List, including the Bank for Development and Foreign Economic Affairs (Vnesheconombank) State Corporation (“VEB”).

US Guidance

The US government acknowledged that US banks’ participation in Russia’s Eurobond offering likely would not violate these financial sector sanctions, which do not prohibit purchases of Russian government-issued debt. The Treasury and State Departments nevertheless warned US banks that helping finance Russian debt undermines US foreign policy. They further warned that US banks’ financing could be diverted to sanctioned entities like VEB, resulting in potential sanctions violations. The State Department also warned banks of the reputational risks of participating in the offering. EU officials echoed these warnings. As a result, by early March 2016, all six US banks indicated that they would not take part in the offering. European investors have traditionally been more willing to take on Russian risk, but in this case they are following suit.

In April, two senior Russian officials indicated that Russia would shelve the plan for this year, though Finance Minister Anton Siluanov said the government “isn’t closing the window of possibility” to offer Eurobonds. In an interview on May 3, Deputy Finance Minister Maxim Oreshkin stated that the authorities “are now considering whether [they] should go” forward with a sale or not. Russia is now trying to raise money by selling a stake in its sanctioned energy giant, Rosneft. While US sanctions do not technically prohibit the participation of US banks in this transaction either, the Rosneft sale will likely suffer similar pitfalls as the proposed bond sale.

What to Expect Going Forward

In the near term, the prospect of lifting sanctions against Russia remains dim. The US and EU have agreed to maintain sanctions until Russia “fully implements” the Minsk Agreement, and at the very least until elections are held in eastern Ukraine in summer or fall 2016. A new sanctions bill aimed at Russia further underscores congressional support for maintaining pressure on Russia. Introduced with bipartisan support by the House Foreign Affairs Committee Ranking Member Eliot Engel (D-NY) and Representative Adam Kinzinger (R-IL), the Stability and Democracy (STAND) for Ukraine Act (H.R. 5094) would codify existing Executive Order 13685 sanctions imposed on Russia for its annexation of Crimea. It would also tighten existing US sanctions on Russia for undermining Ukraine’s territorial integrity by authorizing a strict sanctions-evasion framework and requiring a regular report on foreign financial institutions that are found to be illicitly controlling Ukraine state-owned assets—in particular, targeting Russian banks operating in Crimea.

Even if there is no change in the US/EU Russia sanctions framework, entities seeking to conduct business with Russia can expect US and EU regulators to use expansive soft power beyond the limits of their sanctions enforcement authority to achieve their foreign policy goals.