Wall Street revives Moscow bond trading after US go-ahead

Several major Wall Street banks have begun offering to facilitate trades in Russian debt in recent days, according to bank documents seen by Reuters, giving investors another chance to dispose of assets widely seen in the West as toxic.

Most US and European banks had pulled back from the market in June, after the Treasury Department banned US investors from purchasing any Russian securities as part of economic sanctions to punish Moscow for attacking Ukraine, according to an investor who holds Russian securities and two banking sources.

In July, following subsequent guidelines from the Treasury that allowed US holders to wind down their positions, the largest Wall Street firms have cautiously returned to the market for Russian government and corporate bonds, according to emails, client notes and other communications from six banks, as well as interviews with the sources.

The banks that are in the market now include JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Deutsche Bank AG, Barclays Plc and Jefferies Financial Group Inc, the documents show.

The return of the largest Wall Street firms, the details of the trades they are offering to facilitate, and the precautions they are taking to avoid breaching sanctions are reported here for the first time.

Bank of America, Barclays, Citi and JPMorgan declined to comment.

A Jefferies spokesperson said it was "working within global sanctions guidelines to facilitate our clients’ needs to navigate this complicated situation".

A source close to Deutsche Bank said that the bank was trading bonds for clients on a request-only, and case-by-case basis, to further manage down its Russia risk exposure, or that of its non-US clients, but won’t do any new business outside of these two categories.

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Stranded assets

About $40 billion of Russian sovereign bonds were outstanding, before Russia began what it called a "special military operation" in Ukraine in February.

Roughly half of that amount was held by foreign funds. Many investors got stranded with Russian assets, as their value plummeted, buyers disappeared, and sanctions made trading hard.

In May, two US lawmakers asked JPMorgan and Goldman Sachs Group Inc for information about trades in Russian debt, saying that they may undermine sanctions. The following month, the Treasury's Office of Foreign Assets Control banned US money managers from buying any Russian debt or stocks in secondary markets — prompting banks to pull back.

Regulators have since taken steps to help ease the pain for investors.

The Treasury provided further guidance on July 22 to help settle default insurance payments on Russian bonds. It also clarified that banks could facilitate, clear and settle transactions of Russian securities, if this helped US holders wind down their positions.

Separately, European regulators have also eased rules to allow investors to deal with Russian assets, by allowing them to put them into so-called side pockets on a case-by-case basis.

The price of some Russian bonds has jumped alongside the renewed trading activity since late July. That could make the trades more attractive to investors, and also help companies that sold protection against Russian default.

For example, US bond manager PIMCO — which was on the hook for a payout of around $1 billion after Russia defaulted on its dollar debt in June — could now save around $300 million, one investor estimated. PIMCO declined to comment.

"There’s some bid emerging for both local and external bonds for the first time in a while," said Gabriele Foa, portfolio manager of the Global Credit Opportunities Fund at Algebris, who follows the market for Russian securities.

"Some banks and brokers are using this bid to facilitate divestment of Russian positions for investors that want to get out."

Reuters could not establish who was buying the bonds.

Lots of rules

Some banks are offering to trade Russian sovereign and corporate bonds, while others are offering to facilitate trades in bonds denominated in both roubles and US dollars, according to the documents and the investor who holds Russian securities. However, they are also demanding additional paperwork from clients and remain risk-averse.

In a research update to clients on Wednesday, for example, Bank of America declared in capital letters in red:

"Bank of America is now facilitating divestment of Russian sovereign and select corporate bonds.”

However, it added that it would be acting as "riskless principal on client facilitation trades", meaning a situation where a dealer buys a bond and immediately resells it. It also warned there were "a lot of rules around the process", which remained subject to "protocol and attestation".

The approaches also differ among banks. In some cases, for example, banks are offering clients to help divest their holdings — as well as other types of trades, that would reduce exposure to Russian assets — while others are limiting trades to asset disposals only.

At times, they ask investors to sign documents prior to trade execution that would allow the banks to cancel trades if the settlement does not go through, and risks leaving the banks with Russian paper on their books, according to one of the documents and the investor.

One bank warned clients that settlements would take longer than usual.

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