Chavez’s Russia Bank Beats Citigroup in Venezuela Bond Sales

A Russian bank whose biggest shareholder is the Venezuelan government is overtaking Citigroup Inc., Credit Suisse Group AG and Deutsche Bank AG in bond underwriting in the South American country.

Evrofinance Mosnarbank SA managed $3.6 billion in bond deals from the Venezuelan government this year, while Credit Suisse, Deutsche Bank and Citigroup followed with $3 billion, $2.1 billion and $1.5 billion respectively including securities sold by state-owned oil company Petroleos de Venezuela SA, according to data compiled by Bloomberg. Evrofinance didn’t do any deals in Venezuela last year, when Citigroup ranked first with $3 billion.

President Hugo Chavez, who has led the OPEC-member nation since 1999, has strengthened ties with Russia in a bid to equip the military after a U.S. arms embargo in 2006 and to attract investment in the energy industry. Venezuela’s national development fund, known as Fonden, bought a 49 percent stake in Evrofinance earlier this year.

“They’re looking to formulate a greater financial alliance between themselves and other countries, if not ideologically aligned, politically aligned,” said Bret Rosen, a Latin American strategist at Standard Chartered Bank in New York. “Russian banks haven’t appeared in any other Latin American issues that we are aware of.”

Evrofinance is entering the underwriting business at a time when the government is boosting sales of dollar-denominated bonds to a record as it raises funds for agricultural projects, housing and job creation plans in a bid to cement Chavez’s re-election next year. The government and PDVSA have sold $15.2 billion of dollar-denominated bonds in 2011.

Borrowing Costs

Venezuela has the third-highest borrowing costs among emerging-market countries tracked by JPMorgan Chase & Co.’s EMBI Global index. The extra yield investors demand to own Venezuelan government bonds instead of U.S. Treasuries was 1,265 basis points, or 12.65 percentage points, today at 12 p.m. in Caracas, compared with 217 basis points for Brazil and 212 basis points for Mexico.

Evrofinance hasn’t handled any bond sales this year outside of Venezuela, according to data compiled by Bloomberg. The bank, based in Moscow with offices in Caracas and Beijing, was first hired by the Finance Ministry to co-manage a $4.2 billion sale of securities in August with Deutsche Bank. It joined with Credit Suisse for a $3 billion sale in October.

The lender was formed in 2003 from the merger of Evrofinance Bank and Mosnarbank, according to its website. The bank is Russia’s 27th-largest by capital, according to the company’s website, which cites rankings by The Banker magazine.

Sales Commission

An e-mail sent to Emilio Junior Farias, who is listed as the head of the Caracas office of Evrofinance, wasn’t returned and phone calls went unanswered. The office in Caracas was closed at 9 a.m. on a weekday when visited by Bloomberg News. Vladimir Senchenko, a Moscow-based spokesman for Evrofinance Mosnarbank, didn’t respond to phone calls and e-mailed questions. Sergey Perminov, a Moscow-based spokesman for OAO Gazprombank, which owns shares in Evrofinance, didn’t reply to an e-mailed request for comment. Phone calls and an e-mail sent to VTB’s media relations unit weren’t immediately answered.

“The government is using Evrofinance for these bond sales as a way to work within its own financial circle,” Francisco Faraco, president of the bank consulting firm Faraco y Asociados and a former economic adviser to the central bank in the early 1980s, said in an interview. “The demand always outpaces supply in local deals, so they don’t have much work to do in securing buyers for the securities and they’re able to simply pocket the commission.”

Iran, Russia

An official at the Venezuelan Finance Ministry, who asked not to be identified because he isn’t authorized to speak publicly, declined to comment about whether Evrofinance is securing deals due to political ties, and said that Minister Jorge Giordani wasn’t available to comment. He declined to comment on how much Fonden paid for its stake in the bank.

Chavez has vowed to construct a multi-polar world along with allies including Iran, China and Russia to counter the political, economic and military power of Europe and the U.S., which he calls the “empire.”

Chavez, Russian President Dmitry Medvedev and Prime Minister Vladimir Putin have worked on forming the bi-national bank since signing preliminary agreements in 2008. Evrofinance will extend loans for Russian projects in Venezuela, including the development of heavy crude blocks in the Orinoco Belt, one of the world’s largest oil deposits, Igor Sechin, Russia’s deputy prime minister, said on Oct. 6 during a visit to Caracas where he met with Chavez.

Ratings Review

Chavez said Oct. 7 that Venezuela and Russia will contribute $2 billion each to boost the capital of Evrofinance.

Chavez has also tapped Russian financing for a $4 billion loan to purchase weapons and defense equipment through 2013.

Moody’s Investors Service gives Evrofinance a Ba3 deposit rating and put the bank on review for downgrade in February following Venezuela’s acquisition of its stake, citing a lack of clarity about its ownership structure, which also includes Russian banks VTB Group and Gazprombank Group as shareholders.

Moody’s said in an Oct. 28 statement that the bank has been strengthened by “significant funding” from Russian and Venezuelan companies, leading to an increase in total assets to 125 billion rubles ($4.1 billion) from 36 billion rubles.

Still, “stability of the venture is yet to be tested due to uncertainties over the interstate relationships and unclear mechanisms of support,” Moody’s said.

Discounted Abroad

Karen Laureano-Rikardsen, a spokeswoman for Credit Suisse in New York, declined to comment on the bank’s underwriting in Venezuela. John Gallagher, a Deutsche Bank spokesman in New York, declined to comment in an e-mail. Anthony Ingham, a Citigroup spokesman, declined to comment in an e-mail message.

Chavez has also encouraged banks from other allied nations to open branches in Venezuela. Iran’s export bank has operated a branch in Caracas under the name Banco Internacional de Desarrollo CA since 2007.

The latest bond sale, for $3 billion of notes due 2026 with an interest rate of 11.75 percent, drew bids of 95 cents on the dollar. The price declined to 74.84 cents in the first day of trading abroad, with a yield of 16.28 percent, according to data compiled by Bloomberg.

Allocation Process

The government is increasingly allocating its dollar bonds to state-run banks and institutions, and also using the securities to prop up the central bank’s currency market known as Sitme, said Asdrubal Oliveros, the director of Caracas-based researcher Ecoanalitica. Venezuela is trying to avoid issuing them to individuals and private companies who often sell the bonds immediately abroad to obtain foreign currency, he said.

“The allocation process for the sales coordinated by Evrofinance, a bank partially owned by the government, has clearly favored the public banking system,” Oliveros said. “The state is essentially paying themselves, which is an evident conflict of interest. There’s no longer a wall between the underwriter and the issuer.”

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