Someone forgot to tell you that Russia is capitalist now, and we live in a global economy where money has all sorts of ways of moving around. The big bad Russian capital market is back, not as wild and woolly as before, but it is luring American firms again, this time propelling J.P. Morgan and Goldman Sachs subsidiaries into the top two and three dealmakers in the country. They've collected more broker and underwriter fees this year so far than they did last year.
Broker fees are exactly what Carter Page earned on a Rosneft deal. Page is the Trump campaign foreign advisor who is consistently held up as an example of the Trump team's "connections to the Russians". His connection to the Russians is legally different than Morgan and Goldman, but brokering a deal in Russia, come to find out, is quite legal. Wall Street investment houses would like more of it if they could get it.
Both Goldman and J.P. Morgan offices in Moscow lead the leaderboards of dealmakers this year as of April 20. Deals they have participated in include but are not limited to equity offerings, bond issues, and loans. Investment banking deals rose 32% in the 12 months ending April 20 compared to the same period in 2016, according Madison Avenue based consultancy Freeman & Co. Those two name brand investment houses have been riding the trend all year. What makes them not run afoul of sanctions -- and this may be more a matter of political will than letter-of-the-law -- is that the money received stays in Russia, or is sometimes moved offshore to Hong Kong, some industry insiders say.
As far as the top banks go, VTB Capital was the market leader again with 18% of the market share in investment banking fees, or about $16 million as of April 20. Goldman and Morgan's appearance on the board marks the first time either of them have appeared in the top three in five years, bne IntelliNews reported. JP Morgan trails VTB with an 11.4% share, or about $10 million in fees this year. They are up from sixth place last year.
“If you’re looking at the post-sanctions short-term, the market looks pretty strong,” Jeffrey Nassof, a vice-president at Freeman, tells bne IntelliNews. “Interestingly, we even saw the Western banks getting on some of the major deals this year – Goldman, Credit Suisse and Morgan Stanley led the Detsky Mir IPO a couple of months ago.” Detsky Mir is the Toys R Us of Russia.
One of the reasons investment banks and sanctioned entities in Russia are desperate to see sanctions removed is so they can move money out of the country. This is particularly true for investment companies with money currently tied up in country either in bank accounts or as equity and collateral deals based on illiquid assets like real estate.
The overseas offices of U.S. investment banks have been locked out of Russia’s capital markets last year in a quasi-sanction placed against them by Vladimir Putin. Russia re-entered the bond market last year after a two year self-imposed freeze due to sanctions by the U.S. and European Union, testing the waters for demand. When the IPO and bond windows reopened, Russian issuers were cautious about using foreign arrangers out of fear of getting hit with sanctions charges. On the flip side, U.S. banks were just as nervous.
Washington's sanctions on Russia were implemented in July 2014 as a punishment for Russia's support of a separatist movement sweeping Ukraine. The sanctions are very specific, but companies tend to remain cautious because those that have run afoul of U.S. sanctions in the past have been fined heftily for it. BNP Paribas was fined a record $8.9 billion for doing banking business with the Iranians, then under a U.S. sanctions.
Current U.S. sanctions on Russia ban joint ventures in oil and gas exploration, including financing oil and gas drilling and exploration, and technological swaps. The U.S. also has sanctions on Russian banks, banning U.S. companies from receiving money or loaning money to Russia's sanctioned banks. VTB Bank, which owns VTB Capital, is one of the banks sanctioned by Washington.
See: Russia Investors Get No Love From Trump -- Forbes
Rosneft Asks Putin To Allow For JP Morgan Loans -- Forbes
Sanctions do not ban American entities from other sectors of the economy, nor does it ban advisory services. While much of this is open to interpretation by government courts, American firms are allowed to broker deals with Russian companies and those that have done so feel confident that they have not broken sanctions rules. This now includes two of the biggest banks on Wall Street, including Goldman, which is firmly part of the Trump Administration.
Sources in Russia's oil and gas industry, as well as those in the financial services industry, told me that Trump's former advisor Page worked with Gazprombank as one of the brokers in the Rosneft deal to sell a state-owned class of shares to Glencore and the Qatar Sovereign Wealth Fund late last year. Some have suggested that Page put money in an offshore account in the Caribbean, under U.S. jurisdiction. That could set it up for trouble with sanctions law. But those close to the deal said the offshore accounts were actually for A-list British executives with longstanding business ties to Russia. Both Rosneft and Gazprombank are sanctioned entities, but conducting non-energy deals with them is not part of the sanctions regime. U.S. investors are also allowed to trade shares of Russian energy companies through mutual funds and exchange traded funds. VanEck Global's Russia Vector ETF has $1.8 billion in Russian securities. Energy accounts for nearly a third of that portfolio.
On the other hand, Exxon's joint venture to drill for hydrocarbons in the Kara Sea with Rosneft, and to share technological know-how, is absolutely banned under U.S. sanctions. Exxon has reportedly lost an estimated $1 billion as a result.
Numerous investment firms are doing business with sanctioned Russian companies. Some, like JP Morgan, are keeping money in Russia.
Others are getting income payments from them.
In March, Gazprom saw strong demand among U.S. and European investors for its $1.02 billion bond sale. Buyers of bonds are essentially loaning money to a company. JP Morgan, Deutsche Bank, Gazprombank and VTB Capital were the lead managers on that issue. In the same month, Gazprom raised another $750 million in a dollar-denominated bond, its first in the market since Russia illegally acquired Crimean real estate from Ukraine in a land grab that drove a wedge between the Kremlin and Washington.
The total value of initial and secondary share offerings raised on the Moscow exchange this year hit $1.2 billion, a six-year high, according to bne IntelliNews.
