* Confusion about sanctions keeps investors cautious
* Worries that broader sanctions will include Russia corp
* Sanctions could hit bondholders, payment agents
* Russian economy links with world make sanctions harder
By Carolyn Cohn
LONDON, May 7 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
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
authorisation 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.
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
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."
(Additional reporting by Sujata Rao; editing by Janet McBride)