Steen Jakobsen
The Bank of Japan has abandoned quantitative easing and the European Central Bank may taper its bond-buying programme, so what is the role of central banks in 2017, asks Saxo Bank’s chief economist Steen Jakobsen.
Article / 24 May 2016 at 10:26 GMT

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

Russia oil and gas expert
United Kingdom
  • $3 billion eurobond is Russia's first sovereign FX issue in nearly three years
  • New issue boosts outstanding amount of USD-denominated eurobonds to $46.68bn
  • Offering was reportedly oversubscribed, with $5.5bn of mainly domestic demand
  • New issue apparently aimed primarily at Russian banks
  • Placement may have come as something of a shock to rest of the market
  • Finance ministry likely to sell USD proceeds to central bank for newly printed RUB
  • That means an increase in FX reserves and more roubles to plug budget deficit
  • Overall an expensive way to gauge foreign interest in buying Russian FX debt

Russian finance ministry
 The finance ministry is likely to sell the USD proceeds of the bond sale 
to the central bank for roubles. Photo: iStock

By Nadia Kazakova

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). 

Russian outstanding eurobond issues, $ billion


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

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.

Russian USD-denominated eurobonds yield-to-maturity, %
Source: 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.

The Kremlin
 New placement may prove an all-around positive
for the government. Photo: iStock 

— Edited by John Acher

Nadia Kazakova is an expert on Russian oil and gas

25 May
Nadia Kazakova Nadia Kazakova
According to various media sources, Russia placed $1.75 billion of the 10-year USD Eurobonds. The yield is said to be 4.75%. Apparently, 75% of the issue was bought by foreign investors and $550 million by Russian non-state controlled banks.
25 May
Nadia Kazakova Nadia Kazakova
The yield seems at a bit too high and the placement size a bit too low if demand was indeed around $9 billion as reported.


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