The EU has followed the lead of US institutions in warning European banks against participating in Russia's first sovereign Eurobond issue since the introduction of the Western sanctions over Ukraine, the Financial Times reported on March 14, citing unnamed sources "familiar with the guidance".

Withdrawal of European banks would be a serious blow to Moscow's plans, as market sources told bne IntelliNews earlier in March that a number of European lenders were ready to help the Kremlin arrange a $3bn sovereign Eurobond after the US Treasury warned Wall Street lenders to stay away.

The US government reportedly warned US banks that participation in the deal would undermine international sanctions imposed on Russia in 2014 for its role in the Ukraine conflict.

The EU and US sanctions do not specifically prohibit acquiring Russia's sovereign debt, but proceeds from the placement could potentially be channelled down to sanctioned entities, the Brussels guidance to EU banks reportedly says.

"It is clear that they don't want us to take part," one banker told the FT. "We are being discouraged."

The ability of Russia to place the Eurobonds might determine the future of the sanctions regime and the readiness of the EU and the US to impose it in grey and loosely-defined areas.

Some proceeds would be channelling the funds to one of the state-controlled enterprises that are directly sanctioned as Russian authorities try to find a new balance of distributing the fiscal resources amid second consecutive year in recession and a long-term decline in oil prices.

One of such entity is the troubled state development bank Vneshekonombank (VEB). "VEB’s got a trillion-rouble hole — they've got to come up with the money somehow," a senior unnamed banker in Moscow told the Financial Times.

Meanwhile, Vedomosti reported that Morgan Stanley slammed the Russian government as overly optimistic and having "no appetite" for reform, citing the investment bank's review of talks with the Finance Ministry, the Ministry of Economic Development, and the Central Bank ahead of the Eurobond placement.

"Our meetings in Moscow have revealed an absence of consensus on future drivers of growth," Morgan Stanley commented, according to the newspaper, which appeared to quote directly from the text of the review.