From the US Treasury’s Office of Foreign Assets Control on Wednesday:
The following transactions by U.S. persons or within the United States involving the persons listed below are hereby prohibited: transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity of these persons (listed below), their property, or their interests in property…
Note that wording carefully. “US persons” could extend beyond the US. Meanwhile “new debt of longer than 90 days maturity” could extend beyond US dollar debt.
It does not, however, include US dollar clearing generally, the US Treasury says. Nor,it seems, CDS which references prohibited underlying debt.
Now note whose debt — not all transactions; debt — US banks, US clearing systems, and US investors may be prevented from dealing with accordingly:
Rosneft
Novatek
Gazprombank
Vnesheconombank
Novatek
Gazprombank
Vnesheconombank
Those are commanding heights of the Russian economy (although Gazprom itself is absent), and a good chunk of its financial services. Gazprombank for example is the third-largest lender in Russia… and has been preparing for sanctions.
Meanwhile, in other sanctions not limited to debt announced on Wednesday,Kalashnikov Concern has been added to the list. Americans are assured that they may still sell AK-47s at gun shows… just not to Kalashnikov Concern.
Now, for OFAC, according to the FAQ:
The term debt includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.
So… would that include US persons involved in oil prepay deals with Rosneft? (It appears to us that Rosneft remains able to sell oil for US dollars cleared by a US bank for example.)
There’s (at least) $2bn of syndicate bank lending which may want to know.
In any case these are the most financially sophisticated sanctions we’ve seen so far in the Ukraine crisis. Previously, in other sanctions regimes, OFAC’s influence has often seemed to lie in ambiguity: orders were apparently broad but not hugely detailed — and woe betide any financial institution which tried to play fast and loose. This, though, seems to be a different level of detail (such as the debt vs derivatives point).
How does that change sanctions regimes in future?
Although if US investors continue to anticipate the broader spirit of sanctions rather than just the law, what does that do to Russian companies’ funding plans in the medium term?
Rosneft has $20bn in cash; other companies might seek funding in Europe or Asia versus darkening the doors of US markets again. But that may come at a higher cost of debt and may still ultimately depend on having access to US dollar clearing. That access still exists — for now. But it could be removed in future if sanctions go further. And as BNP Paribas’ recent example shows, it hurts to lose it.
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