Theresa May has agreed to look into imposing a ban on the City of London from helping Russia to sell its sovereign debt, which prop ups the Russian economy.

Last month, City clearing houses, working alongside a major sanctioned Russian bank, helped issue $4bn (£2.83bn) of eurobonds to finance Russian sovereign debt, of which nearly half was sold in London markets. Nearly half the debt was bought by London-based investors, predominantly institutional investors.

A loophole in EU and UK legislation has allowed sanctioned Russian banks, primarily VTB bank, to act as the main organisers – known as book runners – for the issuance of Russian debt.



A public call for the loophole to be closed has been made three times in the past week by the foreign affairs select committee chairman, Tom Tugendhat.



On each occasion ministers seemed to be unaware of the issue, but the foreign secretary, Boris Johnson, last week described the idea as interesting. Speaking to the liaison committee of MPs on Tuesday, the prime minister said she would report back on the policy options.

The foreign affairs select committee is setting up an inquiry into how the UK financially props up Vladimir Putin’s allies, and the measures the UK has taken to clamp down on corrupt Russian money in London.

Tugendhat has been briefed by a British research fellow at the Harvard Society of Fellows, Emile Simpson, who has argued Russia’s greatest weakness is its dependence on western investors. He contends a policy blindness leads the west to sanction individuals, and sometimes sectors, but not to look at sanctioning the Russian state as a whole.

He said: “At present, Russia can borrow in EU and US capital markets despite western sanctions and then can support the sanctioned Kremlin-linked banks and energy companies that can no longer do so”.

Tugendhat has proposed that Russian bond sales are no longer made available to key western clearing houses such as Euroclear and Clearstream, making them effectively untradeable on the secondary market and so deterring the majority of EU and US investors from buying them.

Last month’s sale was specifically skewed to make it attractive for Russian citizens living overseas to repatriate their money to Russia, a long-term goal of Putin.

Urging the foreign secretary to look at the issue, Tugendhat said: “One of the ways that people are getting their money out of this country is by allowing Russian sovereign debt to be sold in the UK, and that debt to be used to reimburse Russians, in a way, to bring back their money onshore, in Moscow terms. As that gold is moving towards Moscow, we are, quite extraordinarily, enabling those bond auctions, those debt auctions.”

Russia has made a point of emphasising western financial support for Russian bonds.

Citing interest from German investors, Russia said on Tuesday it may return to foreign debt markets later this year with bonds in different currencies and maturities.

Russia has relatively low public debt levels ($122bn in domestic debt and $38bn in eurobonds as of the end of the third quarter of 2017), but it still needs to issue hard currency debt to service its external debt obligations.

Simpson claims the loophole “all but confirms Putin’s assumption that western leaders are so nervous about upsetting financial markets that they will forfeit the only serious weapon they have to push back on illegal Russian activity short of military means”.

Any sanctions are likely to have a swift impact. Clearstream has in the past been penalised by the US for breaking the Iranian sanctions regime, and had to pay a $152m fine to the US Treasury in 2014.

Critics of the proposal will claim that sanctions are not realistic and Russia would anyway turn further to China to sell its bonds. A semi-classified US Treasury study in February, ordered by Congress, appeared to come down against sanctioning debt, saying it would disturb financial markets worldwide and damage asset managers.

Foreign investors hold more than a third of Russian debt.