July 2 (Bloomberg) -- Russian companies shut out of the international debt markets are selling more ruble bonds than dollar notes for the first time since 2006 as the domestic currency recovers from its 35 percent devaluation.

OAO Russian Railways, the railroad monopoly, and X5 Retail Group NV, the largest food-store operator, led 261.6 billion rubles ($8.4 billion) of bond sales this year, according to data compiled by Bloomberg. That’s more than double the combined value of the two dollar issues, by state-owned gas exporter OAO Gazprom and farming lender Russian Agricultural Bank.

“Domestic debt looks attractive for investors assuming the ruble remains stable,” said Luis Costa, an emerging markets debt analyst at Commerzbank AG in London. “In the dollar bond market we’re now back to a blue-chip game, while ruble issuance is accessible to a much wider group of companies.”

With international banks and insurers struggling under $1.5 trillion of losses, dollar bonds are all but off limits for companies in Russia, whose economy shrank an annual 9.8 percent in the first quarter, the most in 15 years. The ruble rallied 17 percent against the dollar since the government devalued the currency between August last year and January, making domestic bonds a safer purchase for Russian banks.

Stronger Ruble

The ruble strengthened to 30.47 per dollar on June 3, the highest this year, from as low as 36.56 on Feb. 18. Russia weakened its currency between August and January to protect exporters after oil, their No. 1 product, tumbled. Crude fell to as low as $32.40 a barrel on Dec. 19, before recovering to as high as $69.74 today.

The rebound in the ruble has “added some degree of allure” to the domestic bond market, said Costa.

Investors have pared expectations of a weaker ruble since February, according to an indicator that forecasts the currency’s value versus the dollar. So-called non-deliverable forwards on the ruble signal the Russian currency will be worth 31.87 per dollar in three months, from as weak as 39.08 Feb 2.

Demand for ruble bonds is also helped because Russian lenders are able to pledge the notes as collateral for loans from the central bank, helping create demand for the securities even as the nation remains more badly affected by the global credit crisis than most of its European neighbors.

Without the central bank’s refinancing program, even “selling bonds locally would’ve been difficult,” said Mikhail Galkin, a fixed-income analyst at MDM Bank in Moscow.

Stable Currency

Prices of ruble-denominated bonds have risen as the currency stabilized. The notes climbed 7.2 percent this year, after tumbling 19 percent in 2008, according to the Micex Corporate Bond Index. The index advanced to 87.20 on June 25, the highest level since Oct. 20, a month after the collapse of Lehman Brothers Holdings Inc. in the U.S. roiled debt markets worldwide.

Russian companies have about 1.6 trillion rubles of domestic-currency bonds outstanding, according to data compiled by Bloomberg.

Even as investors are willing to buy ruble bonds, rising demand for funds is driving up interest costs, said Maxim Tishin, a money manager at UFG Asset Management in Moscow, which oversees more than $300 million of debt.

“Ample supply” is causing even state-owned borrowers to pay more, according to Tishin, who said he’s “expecting even more supply from blue chip companies.”

Russian Railways

Russian Railways, the Moscow-based operator of the world’s longest rail network, paid 14.25 percent for its 15 billion rubles of bonds issued on June 24, its sixth deal of that size since March, according to Bloomberg data. The seven-year notes have a so-called put option that allows investors to sell them back to the company at face value after 3 1/2 years.

The coupon on Russian Railways’ bonds compares with the 8.5 percent interest the company paid on 20 billion rubles of three- year notes a year ago.

Raising foreign-currency bonds is “of secondary importance” to Russian Railways, even though the cost of selling bonds in rubles is “inflated,” said Alexei Tokar, head of the treasury department at the state-owned company.

X5 Retail, the Moscow-based retail chain operator that plans to open 100 stores this year, paid a coupon of 18.46 percent on 8 billion rubles of seven-year notes with a two-year put option it sold on June 11.

The interest is more than double the 7.6 percent Russia’s largest food retailer paid investors two years ago for its 9 billion rubles of bonds due in 2014 with a 2010 put option. The company’s borrowing costs are “justified” by the return it expects to get from investing the proceeds, said Anna Kareva, X5’s head of investor relations in Moscow.

No Relief

The increase in ruble bond sales isn’t helping relieve pressure on Russian companies with foreign-currency debt coming due because of the domestic market’s relatively small size, and because the borrowers that are able to sell ruble debt “are not the ones that are desperate to refinance,” said Galkin at MDM.

OAO Mobile TeleSystems, Russia’s largest mobile-phone company, is holding onto the 15 billion rubles it raised from a sale of bonds in May, the biggest domestic-currency issue by a private company this year, according to Bloomberg data. The Moscow-based company will use the funds as a “liquidity cushion” to pay off debt coming due in 2010, said Alexei Kaurov, the director of corporate finance.

MTS’s five-year ruble notes with a two-year put option have a coupon of 16.75 percent, almost twice the 8.7 percent the company paid a year ago on 10 billion rubles of bonds due in 2018 and redeemable in 2010, Bloomberg data show. “The ruble is the right currency for us” to sell bonds “because our revenue is in rubles,” Kaurov said.

Russian companies have $147 billion of foreign debt maturing this year, central bank data show.

Lending Declines

Bank loans aren’t available as an alternative for refinancing dollar bonds to many borrowers, with foreign banks tightening lending, put off as Russia’s economy heads for its first recession in a decade. Companies borrowed the equivalent of $6.1 billion from foreign lenders this year, compared with more than $36 billion in the same period of 2008, Bloomberg data show.

The two issuers of dollar-denominated bonds this year, Russian Agricultural Bank and Gazprom, both based in Moscow, sold $3.3 billion of debt in the U.S. currency between them. That’s down from $12.7 billion of dollar sales in the same period of 2008 and is the least for a first half since 2002.

Foreign-Currency Issues

Gazprom is considering raising money in both foreign currency and rubles, Moscow-based spokesman Sergei Kupriyanov said. The company also sold 500 million Swiss francs ($461 million) of notes in April, the only other foreign-currency issue by a Russian company this year, Bloomberg data show.

Russian Agricultural Bank’s dollar fundraising costs are “acceptable” and the company may also sell more debt in rubles, said a spokesman in Moscow, who wouldn’t be identified citing company policy.

“A Russian company has to be a tier-one name to issue dollar bonds today,” said Max Wolman, a money manager at Aberdeen Asset Management Plc in London, where he helps oversee $4 billion of emerging-market debt.

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

Last Updated: July 2, 2009 07:28 EDT