Yoruk Bahceli, Davide Barbuscia

NEW YORK/LONDON Reuters – Banks continue to talk to potential buyers regarding how to eliminate their Russian corporate loan exposure. But, several banking sources claim that pricing uncertainty, sanctions fears, and pricing uncertainties are limiting buyers’ trading activities.

Two bankers stated that some of the Western sanctions against Moscow following its invasion of Ukraine caused distressed debt buyers to contact banks with Russian loans in order to gauge their willingness to sell this exposure.

A second banker claimed he was able to purchase loans from Russian banks, but feared that additional sanctions might limit his ability to recover the value.

These discussions are tentative and highlight the uncertainty of foreign banks about how they will manage Russia’s exposure, according to Bank for International Settlements data, at $120 billion.

As they are not looking to be accused of dumping paper, banks will often keep their loans in their portfolios and only quietly sell it down through bilateral transactions.

According to one source, the distressed debt desks of two U.S. banks approached him last week about possible interest in selling loans. But he claimed he was skeptical that talks would go anywhere.

“I think they might say they’re interested, it’s exciting for distressed markets, but I think we’re some way off from seeing any real liquidity,” the banker said, speaking on condition of anonymity as the talks are private.

While global banks are familiar with the effects of sanctions, Russia’s curbs have been unmatched in speed, complexity, and scale. Banks must be cautious when dealing with Russian assets and entities.

One loan officer at an American lender stated that there was some talk about Russian bank loans being traded in the secondary markets, but activity was restricted due to a lack of clarity regarding how any deals would be settled.

He said, “Every distressed desk is in this position, they can view something they can purchase at 20, 30, cents per dollar…they will talk with banks but they won’t necessarily agree to anything,”

Additional to the sanctions risk, Russian activity is constrained as it is hard to set a price for Russian assets. Sources say some people believe that some of these hope drops may be temporary, and they prefer to stay put than selling at steep discounts.

These discussions do not stop at bank loans. According to London-based lawyers, funds that specialize in distressed debt are also interested in Russian bonds.

The lawyer stated, “I don’t know of any distressed fund doing nothing right at the moment.”

JPMorgan (NYSE 🙂 announced this week that all Russian bonds would be removed from the emerging market indexes by the end of March. This will increase restrictions on trading Russian paper.

Marcelo Assalin (head of Emerging Market Debt, William Blair Investment Management), stated that liquidity is not great, however, there are bids and offers in today’s market. He also said that Russian bonds could be purchased at around 15 cents per dollar.

“Index exclusion may lead to increased forced selling…” He said that soon the bond prices would be near zero, and many fund managers wouldn’t be in a position to hold them.