In recent days, many big Wall Street banks have started offering to arrange transactions in Russian debt, according to bank papers seen by Reuters, providing investors another opportunity to dispose of assets that are largely viewed as toxic in the West.
According to an investor who holds Russian securities and two banking sources, the majority of U.S. and European banks withdrew from the market in June after the Treasury Department prohibited U.S. investors from buying any Russian security as part of economic sanctions to punish Moscow for invading Ukraine.
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. This is in response to subsequent Treasury guidelines issued in July that permitted U.S. holders to reduce their positions.
Documents indicate that JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Deutsche Bank AG, Barclays, and Jefferies Financial Group Inc. are among the institutions that are currently active in the market.
The return of the major Wall Street companies, the deals they are willing to arrange, and the measures they are taking to avoid violating penalties are disclosed for the first time in this article.
JPMorgan Chase, Barclays, Citi, and Bank of America all refused to comment.
A spokesman for Jefferies said that the firm was “working within worldwide sanctions procedures to assist customers in navigating this complex scenario”
A source close to Deutsche Bank said that the bank trades bonds for customers on request and on a case-by-case basis to further manage its Russia risk exposure or those of its non-U.S. clients, but would not accept new business outside of these two categories.
Before Russia launched what it terms a’special military operation’ in Ukraine in February, there were around $40 billion in outstanding Russian government bonds.
About half were owned by foreign investors.
As their value plunged, buyers vanished, and sanctions made trading difficult, many investors were left holding Russian assets.
Two U.S. congressmen requested information about trading in Russian debt from JPMorgan and Goldman Sachs in May, stating that such transactions may weaken sanctions.
The next month, the Treasury’s Office of Foreign Assets Control prohibited U.S. money managers from purchasing any Russian debt or equities on secondary markets, causing banks to withdraw their investments.
Since then, regulators have taken actions to alleviate investors’ suffering.
The Treasury issued further guidelines on July 22 to facilitate the settlement of Russian bond default insurance payments.
It further stated that banks may assist, clear, and settle transactions involving Russian securities if doing so helps U.S. investors reduce their holdings.
Separately, European authorities have made it easier for investors to invest in Russian assets by allowing them to place them in so-called side pockets on a case-by-case basis.
In tandem with the resumption of market activity since late July, the price of some Russian bonds has increased.
This might make the transactions more appealing to investors and aid firms who provided insurance against the Russian default.
One investor projected that the U.S. bond management PIMCO, which was liable for a payment of almost $1 billion when Russia defaulted on its dollar debt in June, may now save approximately $300 million. PIMCO refused to comment.
Gabriele Foa, portfolio manager of the Global Credit Opportunities Fund at Algebris and observer of the Russian securities market, said, “For the first time in a while, there is demand for both domestic and foreign bonds.”
‘Some banks and brokers are using this offer to aid the sale of Russian holdings by investors who want to exit the market.’
Reuters was unable to identify the bond purchasers.
Some banks are offering to trade Russian sovereign and corporate bonds, while others are offering to assist transactions in bonds denominated in both roubles and U.S. dollars, according to papers and an investor who owns Russian assets.
In addition, they continue to be risk-averse and need further documentation from customers.
In a Wednesday research update to clients, for instance, Bank of America said in red capital letters: “Bank of America is currently aiding the sale of Russian government and select corporate bonds.”
However, it emphasized that it would be serving as a “riskless principal on client facilitation transactions,” which refers to a circumstance in which a dealer purchases a bond and resells it immediately.
In addition, it cautioned that there were “many restrictions surrounding the procedure” that remained subject to “protocol and attestation.”
Banks also vary in their methodologies.
In certain instances, for instance, banks provide customers assistance in selling their holdings as well as other forms of trading that minimize exposure to Russian assets, but others restrict trades to asset sales alone.
According to one of the papers and the investor, they sometimes require investors to sign paperwork prior to trade execution that would let banks to cancel deals if settlement does not occur and risk leaving banks with Russian paper on their books.
One bank informed consumers that settlements might take longer than normal.