Ruble Eurobond Debut in Jeopardy on Depreciation: Russia Credit

Russia is considering delaying its first sale of ruble bonds to international investors as the currency’s biggest monthly decline since May and Europe’s worsening debt crisis weaken investor demand.

Russian officials who have been meeting with bondholders this week to sell as much as $3 billion of the ruble-denominated notes with a maturity of up to five years may postpone the sale until 2011, Deputy Finance Minister Dmitry Pankin said at a conference in London yesterday. Pankin ruled out paying more than the yield on domestic ruble bonds, known as OFZs, according to Interfax. The yield on 2015 OFZs reached the highest level since they were first sold in July at 7.34 percent on Nov. 29.

Ruble bonds are tumbling as concern Portugal and Spain may be next in line for bailouts after Ireland drives investors from assets they consider to be the riskiest. Slower economic growth in Russia and higher inflation than Brazil and China is limiting flows from emerging-market investors. Russian bond funds took in less money last month than those for the other major developing economies known along with India as the BRICs, according to data compiled by Boston-based research firm EPFR Global.

“Everything is crashing because of Europe so there’s no logic to placing a deal now, they would have to pay a very high premium,” Sebastien De Prinsac, the co-head of international debt sales at OAO Gazprombank, the lending arm of Russia’s gas export monopoly, said by phone in Moscow yesterday. “To international investors the most important part of the deal is currency exposure, but if the ruble is going down, you’re screwed.”

Philippines, Chile

The ruble slid 2.2 percent against the dollar in November, the most since a 5.8 percent slump in May when Greece accepted a 110 billion-euro ($143 billion) bailout to prevent the government from defaulting on its debt. The decline outpaced the 1.6 percent drop in the Brazilian real last month.

The sale of ruble bonds would be Russia’s second international debt issue this year, after returning to the dollar bond market in April for the first time since 1998, and the first issue in Russia’s currency. President Dmitry Medvedev said in June he wants to boost the ruble’s place in central bank reserves.

The Philippines, Chile and Colombia have raised $2.8 billion this year in international sales of locally denominated bonds, according to data compiled by Bloomberg. Russia prepared its ruble Eurobond as JPMorgan Chase & Co.’s GBI-EM Global Diversified Index of emerging-market domestic bonds rallied 16 percent for this year to the end of September.

Belarus Deal

Since then, Ireland has accepted an 85-billion euro aid package for its ailing banks, driving yields on 10-year government debt of Spain and Portugal to the highest in at least a decade as investors speculate the euro region’s other heavily indebted countries will also require assistance.

Local debt in developing countries tumbled 4.9 percent in November, the biggest monthly decline since February 2009, the JPMorgan index shows. Belarus postponed “indefinitely” its debut sale of Russian ruble bonds on Nov. 24 and the Russian Finance Ministry delayed the sale of 25.7 billion rubles ($816 million) of OFZs scheduled at auctions today until Dec. 22, according to a statement issued Nov. 23.

The world’s biggest energy exporter has a borrowing target of about 700 billion rubles for 2010, as it strives to close the budget gap it forecasts at 4.6 percent of gross domestic product.

Finance Minister Alexei Kudrin told reporters in Moscow yesterday the issue would be reconsidered “if we don’t like the terms.”

Extra Yield

Ruble Eurobonds aren’t the main focus of Russia’s debt strategy, which will concentrate on fewer and bigger sales of OFZs to bolster trading, Pankin said at a conference in London yesterday. “Our strategy will be first of all to explore all of the local ruble-denominated market, not to borrow internationally,” he said.

Russia’s dollar bonds due in 2020 declined for the first time since May this month, pushing the yield 59 basis points higher to 5.1 percent. The yield on the 8.5 percent OFZs due in November 2021 climbed to 312 basis points above the government’s 5 percent dollar bonds maturing in 2020 on Nov. 4, the biggest gap since the international securities were sold in April, Bloomberg data show. The spread was 235 basis points yesterday.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries increased 11 basis points to 257 yesterday, the highest level since July, according to JPMorgan’s EMBI+ Index. The difference compares with 165 basis points for debt of similarly rated Mexico and 199 basis points for Brazil.

‘Bargain Levels’

The cost of protecting Russian debt against non-payment for five years using credit-default swaps added 5 basis points to 176, the highest level since Aug. 31, according to CMA prices. The contracts, which pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Credit-default swaps for Russia cost 22 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. Turkey’s advantage was the biggest in 11 months yesterday. Russia swaps cost as much as 40 points less than Turkey on April 20.

Russia’s Finance Ministry may delay the ruble Eurobond sale if it can’t issue at “bargain levels,” said Kieran Curtis, who helps manage $2 billion of emerging-market debt at Aviva Investors in London, a unit of Britain’s second-largest insurer. Ruble bonds are a “good alternative to other bonds in the region,” he said.

Russia has higher yields than Hungary, where the central bank is clashing with the government over raising interest rates, Curtis said by e-mail.

Ruble Management

The Russian central bank’s management of the currency to stabilize the exchange rate against a target dollar-euro basket also adds to the appeal of ruble-denominated debt over other emerging European fixed-income assets, Curtis said.

The ruble weakened 0.5 percent to 31.5275 per dollar by the close of trading yesterday, its weakest level against the greenback since June 11. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, showed the ruble yesterday at 31.7625 per dollar in three months.

Dollar-ruble one-month volatility, a measure of swings in the exchange rate, was at 7.94 percent yesterday, compared with 22 percent for the dollar versus the Polish zloty and 18 percent for Hungary’s forint, data compiled by Bloomberg showed. The zloty and forint are free floating currencies.

Capital Flight

Investors pulling money out of Russia spurred the central bank to more than double its estimate for net capital outflows this year to $22 billion on Nov. 16.

China’s economy grew three times as fast as Russia’s 2.7 percent pace in the third quarter, while Brazil and India’s expansion rates in the second quarter were almost double Russia’s 5.2 percent. Russian inflation will exceed the official forecast of 8 percent, Deputy Economy Minister Andrei Klepach told reporters at a conference in London this week.

With annual inflation already at 7.5 percent in October, the prospect of returns at a similar level are “not very exciting,” Paul McNamara, who helps manage $4.5 billion of emerging-market debt at Augustus Asset Managers Ltd., said by e- mail yesterday from London. “There’s a diversification bid but that’s the only reason I can think of why anyone would buy” ruble Eurobonds, he said.

To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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