Russia Debt Sale Flops as Investors Seek Premium After Oil Slide

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Russia had the weakest bond auction result since it was forced to axe a sale in January as investors demanded higher yields to hold the nation’s debt after crude slumped.

While investors bid for almost all of the 15 billion rubles ($236 million) of floating-coupon bonds offered in two auctions by the Finance Ministry on Wednesday, it chose to sell just 2.84 billion rubles, or 19 percent of the total. That was the poorest showing at a debt auction since it canceled a sale on Jan. 13, citing market conditions as oil sank to the lowest since 2009.

“Investors demanded a higher premium for the floaters because of the oil and ruble situation and the Finance Ministry didn’t want to pay it,” said Andres Vallejo, who helps oversee 175 billion rubles as a money manager at Kapital Asset Management in Moscow. “The Finance Ministry is pretty comfortable at the moment but this situation may change within weeks. There’s a cushion but it’s not a big one.”

Investors are once again wary of Russian bonds after crude, the nation’s main export earner, fell 6.8 percent since the Finance Ministry sold all the notes offered at an auction last week. A truce in Ukraine and rising oil prices earlier this year had helped the government return to debt markets with back-to-back sellout auctions as it faces its deepest budget deficit since 2010.

The ruble erased gains of as much as 0.9 percent on Wednesday, retreating 0.9 percent to 63.67 versus the dollar at 7:26 p.m. in Moscow. Brent slumped 1.6 percent to $49.21 a barrel in London.

In Tandem

Government bonds, which gained last month as the central bank lowered benchmark borrowing costs for the fifth time this year, fell today, lifting the yield on February 2027 notes by four basis points to 10.85 percent.

The ruble has been moving more in tandem with the price of Brent crude through the course of 2015, with the relative price moves between the two assets last week reaching the closest since July 2013. In addition to exerting downward pressure on Russian oil and gas revenues, the declining price of oil is weighing on an economy facing its deepest slowdown since 2009 due to sanctions over the conflict in Ukraine.

“Russia’s definitely going to remain a petrocurrency for the next five to 10 years as the share of oil and gas flows dominates export flows,” said Dmitry Dorofeev, a managing partner at the multi-asset White Dragon Global Macro Fund in Moscow, which currently doesn’t invest in ruble-denominated assets.

Russia sold 2.53 billion rubles of floating-rate bonds due January 2020 out of 10 billion rubles offered at auction on Wednesday. Total demand was 10.7 billion rubles. It sold 314 million rubles of floaters due January 2025, with demand of 4.9 billion rubles for the 5 billion rubles of the securities offered.

Shares in Moscow rose for a second day as PJSC Moscow Exchange added 2.4 percent. The bourse reported a 66 percent jump in earnings before interest, taxes, depreciation and amortization in the second quarter. The Micex index rose 1.1 percent to 1,693.07.

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