Russia Self-Sanctioning Means Missing Out on Best Yield Tumble

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Russia's Finance Minister Anton Siluanov
Anton Siluanov, Russia's Finance Minister, speaks during the 26th Congress of the Association of Russian Banks (ARB) in Moscow on April 7. Photographer: Andrey Rudakov/Bloomberg

Russia’s world-beating dollar-bond rally is of little use to Vladimir Putin. His government has locked itself out of the international debt market at least for 2015.

As the U.S. and European Union ratcheted up sanctions last year to prevent some of the biggest companies selling dollar bonds, Russia responded by announcing the government would refrain from tapping international investors. The country may only return to foreign debt markets in 2016, even though yields now look “very respectable,” Finance Minister Anton Siluanov said last week.

It risks missing the moment. Yields on the Russia April 2020 bond have plunged 254 basis points to 4.31 percent this year, the biggest decline of any emerging-market securities in dollars, as the cease-fire in eastern Ukraine eased the threat of further sanctions and stabilizing oil prices improved the economic outlook. An increase in U.S. interest rates or any fresh fighting in Ukraine may undermine the rally, according to Aricapital Asset Management.

“A very sensible step would be to make some kind of non-aggressive issue” of bonds, Fedor Bizikov, who helps oversee about $1 billion as a money manager at GHP Group in Moscow, said by e-mail on Friday. “Sovereign bond yields are already pricing in a best-case scenario.”

‘More Realistic’

Eurobond yields surged almost 4 percentage points from Russia’s incursion in Ukraine’s Crimea region at the end of February last year to the peak of the market turmoil in mid-December. Russia, which has issued more than $22 billion of bonds abroad since 2010, should be “more realistic” in its borrowing and will use local debt auctions and rainy-day oil funds to finance the budget deficit, Siluanov said in February.

The lower house of parliament has approved this year’s budget that doesn’t include foreign borrowings. While there are no plans to borrow abroad at present, “nothing can be ruled out,” Konstantin Vyshkovsky, head of the Finance Ministry’s debt department said April 18 in Washington. “In theory,” part of the ministry’s domestic borrowing plan could be replaced with overseas issuance, he said.

Selling Eurobonds would be an “effective solution” and allow Russia to avoid eating into its international reserves, which are at the lowest level in eight years, according to Alexey Tretyakov, a money manager at Aricapital in Moscow.

“Such favorable conditions won’t last long,” Tretyakov said in e-mailed comments. “Looking at current yields, one would assume the conflict in Ukraine is fully over and oil prices are back to $100 per barrel.”

Negative Yields

Investors are seeking higher-yielding assets as they face negative yields in western Europe and returns near record lows in the U.S. The demand helped push the yield on Russia’s $3.5 billion of bonds due April 2020 to an eight-month low of 4.16 percent on April 9.

A sale “would go nicely” should the ministry offer a 50 basis-point premium to current yields, GHP’s Bizikov said.

The ruble advanced 0.5 percent to 51.6190 per dollar by 12:40 p.m. in Moscow, extending this year’s rally to 17.7 percent. Brent crude rose 0.6 percent to $63.81 a barrel, up 42 percent from this year’s low in January.

While risks in Russia are considerable, they are easy to identify and they are decreasing, Vladimir Miklashevsky, a strategist at Danske Bank A/S, said in e-mailed comments.

Fitch Ratings postponed its decision on Russia’s credit score on Friday after the company resolved to examine the situation in the economy more closely, Siluanov told reporters in Washington after meeting with Fitch representatives.

Eurobonds from Russia would be “polished off” by investors, Dmitry Kosmodemiyanskiy, a money manager at Otkritie Asset Management in Moscow, said by e-mail. “They would take the hand that offered them off at the elbow.”

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