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Ruble Eurobond Debut in Jeopardy on Depreciation: Russia Credit

Russia's president Dmitry Medvedev
Russia's president Dmitry Medvedev said in June he wants to boost the ruble’s place in central bank reserves. Photographer: Norm Betts/Bloomberg

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 was at 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 yesterday in London. “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 last month, pushing the yield 59 basis points higher to 5.1 percent. The yield fell 19 basis points to 4.929 percent today. 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 is 213 basis points today.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries dropped 25 basis points to 231 today, according to JPMorgan’s EMBI+ Index. The difference compares with 142 basis points for debt of similarly rated Mexico and 177 basis points for Brazil.

‘Bargain Levels’

The cost of protecting Russian debt against non-payment for five years using credit-default swaps dropped 9 basis points to 166 points today, 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 20 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. It’s Turkey’s biggest advantage in 11 months. 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 less “political uncertainty” than Hungary, where the central bank is clashing with the government over fiscal policy, 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 strengthened 0.3 percent to 31.4300 per dollar in today’s trading in Moscow, rebounding from its weakest closing price against the greenback since June 11 yesterday. 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 today at 31.7371 per dollar in three months, from 31.0235 on Nov. 1.

Dollar-ruble one-month volatility, a measure of swings in the exchange rate, is at 8.05 percent, compared with 21 percent for the dollar versus the Polish zloty and 19 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 $6.8 billion at GAM Investment Management 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.

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