- U.S. underwriters avoided previous Russian sale amid sanctions
- 2026 bond yield down almost one percentage point since issue
Russia is carving out a new niche raising money abroad without the traditional gatekeepers of the Eurobond market.
Finance Minister Anton Siluanov said he won’t enlist underwriting services of foreign banks anymore after attracting bids for six times the $1.25 billion of bonds the government sold Thursday. State lender VTB Capital managed the sale by itself and placed more than half of it in the U.S., according to the Finance Ministry.
“It is pretty much evidence that Russia can go it alone,” said Jan Dehn, head of research at London-based Ashmore Group Plc, which manages about $52 billion of emerging-market assets, who said he was considering participating. “Foreign banks will be missing out.”
The worst standoff in Russia-U.S. relations since the Cold War has forced Moscow into self-sufficiency as it seeks to finance the biggest budget shortfall in half a decade. This has become easier in 2016 as Russia has gone from a near-pariah to a darling among bond investors fleeing negative yields in much of the industrialized world. The sale on Thursday was a tap of an offering in May in which eligibility from Euroclear Bank SA was held up for two months.
Siluanov said Friday he would exclude foreign underwriters on future transactions, contradicting early comments from his deputy and echoing statements in May after international banks snubbed the deal following U.S. warnings that placing the debt could violate sanctions by indirectly financing sanctioned companies. After the admonishments, Goldman Sachs Group Inc. and at least five other American lenders Russia had approached to underwrite the bonds dropped out of the bidding process.
Once Euroclear agreed in July to settle trades in the bond, the country’s borrowing costs accelerated a decline that has pushed them down by almost one percentage point to 3.82 percent since the initial $1.75 billion Eurobond due 2026 came to market. The spread between the debt and similar-maturity U.S. Treasuries has shrunk to 222 basis points from as high as 316 in July.
The Finance Ministry has been in "close" contact with Euroclear since May and managed to respond to the clearing house’s regulatory concerns, the ministry’s debt department chief Konstantin Vyshkovsky said in an interview on Friday, adding that he hopes that there won’t be any clearing issues with future sovereign Eurobonds.
Europeans were the second-largest group of participants in Thursday’s tap after U.S. participants, buying 43 percent of the deal, according to the Finance Ministry. Amundi Asset Management and Allianz Global Investors were among them, according to fund managers at the two firms.
If Moscow approaches investors with similar-sized deals as this year’s, then there will be “no need for foreign banks,” said Richard Segal, a senior analyst at Manulife Asset Management in London.
For offerings of as much as $6 billion like in the days before sanctions, that would be “a different story,” Segal said.
Siluanov said the Finance Ministry may boost international borrowing next year. This year the budget allocated $3 billion of Eurobond sales compared with a typical pre-sanctions target of $7 billion, when the sovereign would hire lenders such as Citigroup Inc. and Deutsche Bank AG to help manage the placements. Vyshkosvky said Russia is unlikely to borrow more than $7 billion abroad next year and domestic borrowing remains a priority.
The government set the price of Thursday’s tap at 106.75 percent of face value to yield 3.9 percent, it said Thursday.
“It’s a bullish market,” said Sergei Strigo, who oversees $2.7 billion as Amundi’s head of emerging markets in London. “Everything is flying.”