United States: Buying Russian Bonds: Risky Business Or Safe Bet?

In late May, The Russian Federation issued its first sovereign bond since the Ukraine crisis in 2014. The sole organizer of the bond is VTB Capital, an arm of VTB Bank, Russia's second largest financial institution. Both VTB Capital and VTB Bank are subject to sectoral sanctions.

According to published reports, the 10-year bond is being offered at yields of 4.65-4.9 percent. Russia's goal was to raise $3 billion to help with its budget deficit caused by weak oil prices. Reportedly, the bond generated $7 billion of demand, though the Russian finance ministry announced only $1.75 billion in sales. Foreign investors constituted more than 70% of the bond purchasers. According to media reports, large global banks declined to participate, partly due to sanctions compliance risks. But as we will see, the compliance risks aren't very clear. We will examine the exact risks and evaluate the question of why banks might be over-complying.


In response to Russia's annexation of Crimea and its use of force in Ukraine, the U.S. government imposed targeted sanctions against Russia's financial and energy sectors, among other sanctions. The sectoral sanctions are unique because two elements are required to constitute a prohibited transaction: (1) prohibited transaction type plus (2) designation.

Under Directive 1 of the Sectoral Sanctions, issued in 2014, U.S. persons are prohibited from transacting in, providing financing for, or otherwise dealing in new debt with a maturity of longer than 30 days or new equity with entities on the Sectoral Sanctions Identifications (SSI) List. All other transactions with SSI entities are permitted. The SSI List under Directive 1 primarily consists of Russian banks, including VTB Bank. Thus, U.S. persons are prohibited from transaction in, dealing in new debt of longer than 30 days or new equity with VTB Capital. Guidance from the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) is clear that the sectoral sanctions do "not require U.S. persons to block the property or interests in property of the entities identified in the Directives, nor will persons identified in Directives 1 and 2 be added to the Specially Designated Nationals (SDN) List."

Further, OFAC guidance has clarified that purchasing new debt is permitted in which the SSI entity is not the borrower. OFAC's Frequently Asked Questions, FAQ 405 states:

405 Does the prohibition on "otherwise dealing in new debt" of longer than 30 days maturity (for persons subject to Directives 1 and 3) or 90 days (for persons subject to Directive 2) of SSI entities, their property, or their interests in property prohibit dealing in debt with maturity that exceeds the applicable authorized tenor in which the SSI entity is not directly or indirectly the borrower?

Directives 1 and 3 prohibit U.S. persons from dealing in debt of longer than 30 days maturity and Directive 2 prohibits U.S. persons from dealing in debt of longer than 90 days maturity issued on or after the sanctions effective date in cases where the new debt is issued by an SSI entity subject to these Directives. Directives 1, 2, and 3 do not prohibit U.S. persons from dealing with an SSI entity as counterparty to transactions involving debt issued on or after the sanctions effective date by a non-sanctioned party. For example, U.S. persons are not prohibited from dealing in a loan exceeding the applicable authorized tenor that is issued after the sanctions effective date of sanctions provided by an SSI entity to a non-sanctioned third-party, dealing with an SSI entity who is the underwriter on new debt of a non-sanctioned third party exceeding the applicable authorized tenor, or accepting payment under a letter of credit with terms exceeding the applicable authorized tenor that is issued, advised, or confirmed by an SSI entity, so long as the SSI entity is not the borrower. [9-12-2014]

As a sovereign borrower, Russia is not a sanctioned entity. But according to many media reports, large U.S. and non-U.S. banks have declined to participate in the Russian bond offering, citing compliance risks. In February and March of this year, some reports suggested that officials at the State Department and Department of Treasury cautioned banks against participating in any bond sale, that helping finance Russia would be counter to U.S. foreign policy and the objectives of the sanctions.

But does it make sense for the U.S. government to expect private commercial entities to refrain from legitimate transactions when U.S. policymakers have determined to not sanction the conduct in question? The whole point of targeted sanctions is that they are targeted. If the U.S. government wanted to block Russia's access to the U.S. financial system, it could have done so through imposing standard sanctions. But it didn't. That doesn't mean there are no risks in purchasing Russian debt, or that a bank might not independently determine that dealing with Russia constitutes an unacceptable reputation risk (as discussed below), but should banks be required to determine and adhere to the spirit of the sanctions even when the laws say otherwise?

We have seen this phenomenon in the context of Iran as well. European banks are so burned by the gargantuan penalties in cases related to sanctions violations (see BNP Paribas, Commerzbank, Credit Suisse, HSBC, Standard Chartered, the list goes on) that they are wary of dealing with Iran even when it is perfectly lawful. That creates an outcome directly contrary to stated U.S. foreign policy under which sanctioned parties should be rewarded for the behavior the sanctions are designed to produce.

Sanctions can be extremely effective. Targeted sanctions are measured and innovative. But businesses must be permitted to follow the law and not fear getting in trouble.

Ok, so what are the risks?

To some cautious investors, the risks in buying Russian bonds might outweigh the potential rewards. So let's discuss some of considerations that must be evaluated if participating in the bond sale.

  • Dealing with Russia. Even though Russia itself is not sanctioned, the reputational risk of dealing with Russia might be too high for the tolerance of some investors. And U.S. officials warned about returning to "business as usual" with Russia so long as its actions to destabilize Ukraine continue. The fact is Russia is unpredictable. And because U.S. foreign policy toward Russia is continually shifting, the risk of investing there may just be too high for the risk-averse.
  • Dealing with SDNs. While the bond's prospectus states that proceeds will not be used to finance sanctioned entities, it's hard to really determine where the money goes. Much of Putin's inner circle and many other Russian entities have been placed on the SDN List. U.S. persons are prohibited from any dealings with SDNs, so there is a risk that funds might end up in the wrong hands.
  • Compliance Costs. Many investors might find the opportunity appealing, but the cost of compliance and due diligence might not be worth the penny. Even though buying the bonds from an SSI entity is legal under the regulations, investors would still need to implement careful due diligence procedures to ensure that SDNs were not benefitting. Further, because of OFAC's 50% rule, any entity owned 50% or more by an SDN is also sanctioned. Those entities are not on the SDN List. So, you can see how compliance costs would add up if the investor wanted to ensure that no SDN or SDN-owned entity was funded by the transactions.
  • Settlement. At the end of the day, the investment needs to pay off. Many might be unpersuaded of Russia's ability to settle its debt. It is, after all, an oil dependent country subject to Western sanctions.

According to media reports, one Russian banker said that he could sell the bonds just to American investors if he wanted to. "There are enough people there who hate the government and want to make money." The latter part may be true. But for now, many U.S. investors and international banks seem to be avoiding the risky business of investing in new Russian debt.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
13 Sep 2018, Other, Los Angeles, United States

Liisa will be giving opening remarks and presenting, "Big Data and Online Behavioral Advertising (OBA): An Advertiser’s Perspective Origins of big data and how to legally acquire data."

26 Sep 2018, Seminar, San Francisco, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series.

28 Sep 2018, Other, Los Angeles, United States

Leaders today don't just have to worry about nefarious cybercriminals getting "inside" their firewalls; there's an entire ecosystem of SAAS partners, third party vendors and suppliers, and all the hardware from switches to POS terminals that need to be monitored.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions