European banks are poised to help the Kremlin arrange a sovereign Eurobond after the US Treasury warned Wall Street lenders to stay away from the potential $3bn deal, market sources tell bne IntelliNews.

Lenders, including Germany's Deutsche Bank, France's BNP Paribas, Switzerland's Credit Suisse and UBS, along with Italy's UniCredit and Banca IMI, are prepared to help arrange the controversial deal, according to well-placed bankers. But Goldman Sachs already had a rethink about its potential participation and is seeking to withdraw its application, business daily RBC reported on February 29.

Russia has invited 25 Western and three domestic banks to bid to organise a sale of up to $3bn in Eurobonds. Russia will select banks to arrange the Eurobond sale in March, Interfax news agency reported on February 29, citing Konstantin Vyshkovsky, the head of the finance ministry's sovereign debt department.

But the US government has warned some banks that participation in the deal would undermine international sanctions imposed on Moscow in 2014 for its role in the Ukraine conflict. The Russian sovereign has not been sanctioned, but many international lenders will be fearful of raising the hackles of US regulators.  

Paul McNamara, investment director for emerging markets at GAM, which manages $130bn of client assets, tells bne IntelliNews that a Russian Eurobond issue is "75% likely". "Currency in dollars is a win and lead US bankers would be a huge win, but watch for the size as $500mn or thereabouts is a setback."

If Russia succeeds with the bond sale, it will be the first time it has tapped international capital markets since sanctions were imposed two years ago for Moscow's annexation of Crimea and the backing of separatists in East Ukraine.

Any successful deal would be regarded as "major PR coup by Moscow", according to Timothy Ash, head of emerging-market strategy at Nomura International in London. "It will be viewed as a further effort to undermine Western sanctions, if indeed major (European) banks decide to lead manage this deal."

Several Russian banks are likely to be on the deal and the Russian finance ministry will probably award a spot or two to Asian banks as the Kremlin seeks to diversify its funding by pivoting eastwards.

The message from Washington seems to be "participate at your peril", but don't be surprised if it comes back to bite you in an election year, says Ash, who predicts American and British banks will heed the advice coming from the US Treasury.

Tom Adshead, chief operating officer at Macro Advisory in Moscow, calls the deal "doable" even without the US banks. "The Russians have said they have a decent syndicate in any case, and it's not a large issue, so I can't see there being a problem."

In 2013, Deutsche Bank, RBS and Barclays all helped to organise a whopping $7bn Eurobond deal for the Kremlin, along with Russia's VTB Capital, Gazprombank and Renaissance Capital.

"We might see some Italian or Austrian banks on the list, but I doubt the Germans and Dutch though," Ash says in an email note to clients. "So in the end, it seems like 'reputational' risk is still weighing in terms of Western banks willing to do/facilitate business with Russia. Then will be up to end investors, whether they still wish to participate, if the deal ends up coming to market."

Hungry for Russian paper

Deputy Finance Minister Sergei Storchak said earlier in February that many of the invited banks had not yet responded, but the ministry would still have a syndicate large enough to get the deal away.

Eurobond deals for Russian blue chips Norilsk, Gazprom, Evraz and Alfa Bank were heavily over-subscribed late last year, indicating a pent-up demand for Russian paper.

"It makes sense for the Russia sovereign to establish the demand for new issues and follow the trail they blaze," Charlie Robertson, chief economist at Renaissance Capital, tells bne IntelliNews. "Russia has been a good sovereign borrower and with developed market yields this low, Russia should attract significant demand."

Russian government bonds rose to their highest level since November as oil rebounded from low levels and amid growing expectations that the Central Bank of Russia (CBR) will cut key benchmark rates.

Russia bonds maturing in 2023, which spiked at yields of 7.70% in late 2014 after the annexation of Crimea, have since rallied back to 4.35%.

"This suggests that a Russia ten-year could perhaps price in or around the 5% level," ventures Ash. "This is cheap financing in anyone's books."