Putin Facing Crimea Premium as Eurobond Planned: Russia Credit

Russia will have to offer a premium to sell Eurobonds as President Vladimir Putin’s military push inside Ukraine’s Crimea region spurs the world’s biggest losses for investment-grade dollar debt.

“Regardless what happens in Crimea, Russia will certainly have to offer a juicy additional premium for political risk,” Sergey Dergachev, who helps oversee about $10 billion in emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail yesterday. “Investor perception of Russia has changed quite severely, unfortunately, and it will take a lot of time to get this political risk premium reduced.”

The nation’s dollar bonds lost 2.5 percent this year, the worst performance among non-junk sovereigns and compared with a 1.9 percent gain on a global Bloomberg index for emerging-markets bonds. Russia is seeking banks to organize a possible foreign-debt sale, Konstantin Vyshkovsky, the head of the ministry’s debt department, said yesterday. The ministry canceled its fifth ruble-bond auction of 2014 the same day, citing “unfavorable” markets in a statement on its website.

Almost 19,000 Russian troops have helped take control of the Crimean peninsula, where regional authorities plan to hold a referendum in four days about joining Russia, according to Ukrainian Defense Ministry figures. The U.S. and the European Union are preparing sanctions against Russia in response to what they view as an illegal breach of Ukraine’s sovereignty, even as Putin says the moves will protect ethnic Russians who dominate the Black Sea region from “extremists” in Kiev’s government.

Putin’s ‘Message’

The Finance Ministry has sent requests for proposals on the possible Eurobond to lenders, Vyshkovsky said by phone yesterday. He declined to provide further details. Russia seeks to sell the equivalent of $7 billion in foreign bonds in 2014, unchanged from last year, according to budget plans.

The timing of the announcement is “very political,” according to Tim Ash, the chief emerging-markets economist at Standard Bank Group Ltd. in London. “They want to send a message that they can tap markets and counter concerns about the impact of U.S. sanctions,” he said by phone yesterday.

Tension in Ukraine and steps by the Federal Reserve to pare stimulus lifted the yield on Russia’s dollar bonds due April 2020 by 57 basis points this year to 4.34 percent as of 1:55 p.m. in Moscow today, three basis points below a six-month high. That compares with a 42 basis point drop to 3.32 percent for similar notes from Brazil. Both countries’ securities are rated at BBB by Standard & Poor’s and Fitch Ratings, the second-lowest investment level.

Gauging Interest

The Finance Ministry may be “testing the waters to see what kind of interest there might currently be in the market,” Olivier De Timmerman, a money manager at KBC Asset Management in Luxembourg, who oversees $600 million in emerging-market bonds including Russian government debt, said by e-mail yesterday. “The current situation has induced more volatility so on a risk-reward basis it makes sense to ask for a bigger premium.”

The government may need to offer a 50 to 60 basis point premium to lure investors, according to Dergachev.

Russia’s sole foreign debt sale last year attracted $17 billion in bids. The yield on $3 billion of 2023 dollar bonds, sold as part of that Sept. 9 deal and priced to yield 5.11 percent, dropped 84 basis points by Oct. 31. The rate on the notes was little changed at 5.31 percent today, a lifetime high.

Corporate Borrowers

Weak market sentiment is also affecting Russian corporate issuers, with lender OAO Promsvyazbank postponing a bond sale due to market conditions, Peter Fedosenko, head of fixed income sales, said by phone from Moscow on March 3. OAO Lukoil, Russia’s second-biggest oil company, will wait for more favorable conditions before selling bonds to overseas investors, Interfax reported March 6.

“In the short run, headlines regarding the Ukrainian situation will probably remain a source of volatility for Russian issuers and possibly act to delay financing plans,” Roberto Matta, a fixed-income portfolio manager at BSI SA in Lugano, Switzerland, said by e-mail yesterday. Still, “the current situation looks temporary and I don’t see significant market access problems over the medium term,” he said.

The average yield on Russian corporate bonds jumped 20 basis points to 6.55 percent, the highest since January 2012, according to the Bank of America Merrill Lynch index data. The securities lost 3.2 percent this month, approaching the biggest monthly loss since June, the data show.

Investor Demands

“Corporates are paying the price as international investors demand a higher risk premium to be compensated for the political risk,” Andreas Fischer, a Zurich-based money manager at Credit Suisse Group AG, said by e-mail yesterday.

Ukraine began military drills March 10 to test combat readiness after Russia’s intervention. The European Union told Putin he must switch course in Crimea or risk sanctions, while Ukraine’s ousted President Viktor Yanukovych warned of a possible civil war at a news conference in Russia yesterday.

The Finance Ministry’s scrapped its second weekly ruble-bond auction in a row and its fifth during 2014, according to a statement yesterday. Russia’s local notes gave investors a 12 percent loss in dollar terms this year, the worst performance among 31 emerging-market indexes compiled by Bloomberg.

The ruble was little changed at 42.8487 against the central bank’s target basket of dollars and euros today. It has weakened 10 percent to the dollar this year, the biggest drop among 24 emerging-market peers after the Argentine peso.

Waiting Game

The yield on the government’s April 2042 dollar bonds was steady at 6.25 percent today. The extra yield on Russia’s dollar debt over Treasuries rose six basis points to 303, indexes compiled by JPMorgan Chase & Co. show.

Russia plans to sell Eurobonds this year and won’t “force” a placement in the current market, Interfax reported March 5, citing Deputy Finance Minister Sergey Storchak. The ministry may opt for several sales this year, Finance Minister Anton Siluanov said on Feb. 21.

The request for proposals is part of “long-term plans for the future, so that when the market situation stabilizes, the government is prepared to sell,” Dmitry Postolenko, who manages about $110 million at Kapital Asset Management in Moscow, said by phone yesterday. “Right now isn’t the best time for a placement, it’s better to wait.”

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