The US State Department and the Treasury have reportedly warned the country's largest financial institutions not to buy Russian sovereign Eurobonds, the Wall Street Journal reported on February 25, citing unnamed sources.

After being absent from the international debt market since 2013, the Russian government in early 2016 hired a number of foreign investment banks to organise a $3bn Eurobond placement, potentially blowing a hole in the sanctions regime imposed on the country by the US and the EU in 2014 over its actions in Ukraine.

According to the newspaper, US authorities warned that acquiring Russia's Eurobonds would undermine the sanctions, which are to remain in place as long as Russia continues to destabilise the situation in Ukraine. The reputational risks and high geopolitical instability of Russia as an issuer were also mentioned.

While the sanctions do not limit Russia's sovereign debt, Western governments are concerned that proceeds from the Eurobonds can be channelled to sanctioned state-controlled companies or military spending.

Andrey Belousov, a former Russian economy minister and current economic advisor to President Vladimir Putin told Kommersant daily that such warnings will not influence the terms and prospects of the placement.

Among the US banks invited to subscribe for Russian Eurobonds are Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, and Morgan Stanley. According to the WSJ, Citibank reportedly said it will not participate in the placement, while Goldman Sachs and JP Morgan are still undecided.

Some representatives of American banks believe their invitation to join the book on Russian securities was a move to test whether such debt instrument was still possible in the current sanctions setting.

Besides Russia's state-owned Sberbank, VTB and Gazprombank, proposals have been sent to a whole roster of the biggest banks in Europe and the US, including Goldman Sachs, Barclays, BNP Paribas, Bank of America Merrill Lynch, HSBC and UBS.

On February 9, the Russian government sent out an additional five requests to investment banks, adding Canada's Scotiabank, Italy's UniCredit, Japan's Mizuho Financial, Agricultural Bank of China and China Construction Bank to a list of 23 other lenders who were approached about helping the sovereign to tap international credit markets.

The presence of three lenders from China and Japan indicates the Kremlin is still trying to partly pivot its financing needs from Asia.

"Moscow is playing with the West now, and trying to force the issue over sanctions," Tim Ash, chief strategist at Nomura International, wrote earlier in an e-mailed note. "Sending a message, 'look all your banks now want to do business with us, so why not let them.'"

Russia last sold a Eurobond in 2013 worth $7bn with the participation of VTB Capital, Deutsche Bank, Barclays, Royal Bank of Scotland, Gazprombank and Renaissance Capital. While the EU and US sanctions do not formally target sovereign issues by the Russian government, they limit debt and equity financing for a number of state-controlled corporate and banking majors.

Lawyers surveyed by Reuters point to a loophole which would allow forex proceeds of the sovereign Eurobond issue to be channelled down to sanctioned companies, presenting a challenge to the banks involved in the issue and the governments that initially set the sanctions.