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Russian Bank Bond Rally Masks Pain to Come on Sanctions

Sberbank CEO Herman Gref
Herman Gref, chairman of OAO Sberbank, said in June the industry faces an “acute” shortage of long-term ruble funding. Photographer: Simon Dawson/Bloomberg

A two-day rally in OAO Sberbank and VTB Group bonds after fresh European sanctions on Russia were announced this week is masking market concern the lenders will struggle to fund themselves longer-term.

The yield on the October 2022 bond for Sberbank, Russia’s biggest lender, rose 117 basis points since a Malaysia Airlines jet was shot down over eastern Ukraine on July 17, data compiled by Bloomberg show. The extra yield investors demand to hold the notes compared with emerging-market peers hit a record 290 basis points on July 29, according to JPMorgan Chase & Co. indexes.

While Russia’s central bank has pledged to come to the aid of targeted lenders, the latest sanctions risk driving up their borrowing costs as they squeeze investment. Sberbank and VTB, the second-biggest bank, will be prohibited from selling bonds or shares in the European Union, the bloc said yesterday, after agreeing to new penalties on July 29.

“The longer this east-west standoff runs, the tougher it gets for the Russian economy as a whole, and Sberbank and VTB in particular, as demand for loans collapses,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail yesterday. “That should be a concern for investors.”

‘Short Squeeze’

The yield on VTB’s October 2022 Eurobond, which fell 25 basis points over July 30-31, is still 162 basis points higher than since the passenger jet crashed. Sberbank note yields are down 32 basis points since July 29.

“What we’ve seen in the last few days was more like a short squeeze,” Miklashevsky said. “There’s also the hope that in three months or so the EU will revoke the sanctions.”

Future financing deals will depend on market conditions and on VTB’s funding requirements, the lender said in an e-mailed statement after the sanctions were announced yesterday.

“Sberbank has all the necessary resources, management experience and expertise to continue operating successfully under the circumstances,” the company said in a statement yesterday.

Corporate foreign-currency bond sales have tumbled 67 percent this year from the same period in 2013 to $10.5 billion, the lowest level since 2009, according to data compiled by Bloomberg. Ruble issuance in the first seven months of the year is down 51 percent to 449 billion rubles ($12.6 billion).

The pace of lending growth slowed to an annual rate of 23 percent in May from 35 percent a year earlier, according to central bank data. Herman Gref, chief executive officer of Sberbank, said in June the industry faces an “acute” shortage of long-term ruble funding. Loans to or by the banks are not affected by the sanctions, the EU said yesterday.

China Funding

Russian companies can meet the $136 billion of debt payments coming due by the end of next year, Sberbank CIB analysts said in a report published July 24. In a worst-case scenario, the central bank can deploy its $472 billion of gold and foreign exchange reserves, they said.

OAO Rosneft, Russia’s biggest oil producer, which the U.S. has blocked from bond sales, and OAO Gazprom have won pre-payments from China totalling $100 billion, said Vladimir Kolychev, chief economist at VTB Capital in Moscow. Some of the funding has already been received, he said.

While the Chinese government will provide financing linked to specific projects, it is unlikely to provide broader funding, according to Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow.

“They don’t throw away the money, they’re fully aware of all risks,” Polevoy said by e-mail yesterday. Russia must quell inflation running at 7.5 percent to “lay the foundation for the emergence” of longer-term financing, he said.

Yield Increase

Government ruble bonds due in February 2027 fell yesterday, taking their yield increase in July to 92 basis points after the central bank unexpectedly raised interest rates half a percentage point on July 25. That’s the biggest monthly increase since the bonds were issued in February 2012. The yield rose 15 basis points to 9.57 percent as of 6:21 p.m. in Moscow today.

Russian companies have relied on funding from Europe and the U.S. and will need to find a replacement to support growth, said Vladimir Osakovskiy an economist at Bank of America Corp.

“It is possible to grow using internal resources, if you’re satisfied with 1 percent growth,” he said by e-mail yesterday. “If you want at least 2 percent, you have to find an alternative for long, cheap money.”

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