Russia's $3bn eurobond to kill two birds with one stone

The Russian ministry of finance announced on May 23 a placement of a $3 billion eurobond, Russia's first sovereign FX issue in nearly three years. The placement was mediated by VTB Capital, an investment bank subsidiary of VTB, the second largest bank in Russia, which is on the US sectorial sanctions list. 

According to media reports, the eurobond trading will be cleared by the National Settlement Depository, a Russian entity, rather than two major European clearing agencies. The Depository announced the key details of the eurobond deal on its site. The size of the eurobond is put at $3 billion (15,000 units at $200 million each, maturity on May 27, 2026).

Once placed, the new bond issue would increase the size of the outstanding USD-denominated eurobonds to $46.68 billion from $43.68 billion. Russia has only 10 eurobonds currently outstanding, with the nearest maturity in April 2017 and the longest in April 2042. 

The Russian government has also issued bonds denominated in euro (EUR 0.75 billion) and roubles (RUB 7,398 billion). 

Source: www.cbonds.ru

The new eurobond issue was reportedly oversubscribed, with some $5.5 billion of demand, mostly coming from domestic investors, according to rbc.ru. 

That is not surprising, as an estimated 60-70% of all Russian eurobonds might be held by Russian banks and private investors. The new issue might also be aimed primarily at Russian banks, especially after reserve requirements on non-government FX assets rose from April 1. 

It makes more sense now to cut back on expensive corporate lending (both in terms of capital and risk) and invest in risk-free government paper, which would yield around 5% a year in USD. 

For the rest of the market the placement might have been a bit of a shock. Apparently, there has not been any international roadshow. There might not have been enough time for compliance departments of various bond funds to read the small print and give an all clear. The Russian side did allow some extra time to Asian investors to have a look at the placement by not closing the oversubscribed book on Monday night.

The Russian eurobond papers sold off on Monday morning, but the increase in yields looked mainly like a nervous, if temporary, blip. The weighted average yield-to-maturity on the index of Russian USD sovereign bonds rose to 4.01% on May 23 from 4.98% on May 20. 

The yield guidance for the new bond is 4.65-4.9%, according to media.

Source: www.cbonds.ru. Note: * = to view the 10 issues that constitute the index, click here.

In the prospectus, the Russian government has promised not to use the proceeds in a manner that would break the anti-Russia sanctions, according to Reuters. The Russian media reported that the finance ministry is likely to sell the US dollars to the central bank in exchange for freshly printed roubles. That would mean both an increase in official FX reserves and additional roubles to cover the budget deficit, an all-around positive outcome for the Russian government. 

If the issue goes mostly to Russian banks, not many will object to the government (or the Russian taxpayer) subsidising the banking sector (or eurobond holders) by borrowing at a high rate and then parking the money at the central bank at a much lower rate (say, in USD treasuries or low-yielding deposits).  

It also seems like an expensive way of gauging the interest (or ability) of foreign investors to buy Russian FX debt.

— Edited by John Acher

Nadia Kazakova is an expert on Russian oil and gas