Russia’s Bond Market Return Aborted as Yields Surpass 9%
Russia tested appetite for ruble bonds for the second time in eight weeks yesterday, only to scrap the auction after seeing how much it would pay to borrow as the crisis over neighboring Ukraine escalates.
The Finance Ministry said in a statement that investor bids for the 20 billion rubles ($560 million) in five-year and nine-year OFZ notes on offer didn’t “adequately represent” Russia’s “credit quality.” Government bonds fell for a fourth day, with the yield on 2027 notes rising five basis points to 9.22 percent. The ruble was little changed and the Micex index (INDEXCF) fell.
The aborted attempt to return to the market confirms there’s “no demand” for government securities as the U.S. and the European Union consider further sanctions for what they see as President Vladimir Putin’s destabilizing role in Ukraine, according to Raiffeisen Capital. Russia may forgo foreign-currency debt sales this year and cut domestic borrowing as the weaker ruble boosts taxes from oil and gas exports and helps the budget, Finance Minister Anton Siluanov said last month.
“The Finance Ministry just showed everyone that their previous decision to not hold auctions at all was right,” Konstantin Artemov, a money manager at Raiffeisen Capital in Moscow, said in e-mailed comments yesterday. “There’s just no demand.”
The government, which has canceled outright all but two weekly auctions since Putin’s incursion into Crimea on March 1, has sold just 14 percent of the OFZ notes in 2014 than it did in the year-earlier period, data compiled by Bloomberg show.
The yield on benchmark ruble bonds due February 2027 has increased 86 basis points, or 0.86 percentage point, since lawmakers in Moscow granted Putin powers to use military force in Ukraine on March 1.
The Micex stock index dropped 0.6 percent at 1:27 p.m. in Moscow. The ruble advanced less than 0.1 percent to 41.7885 against the central bank’s dollar-euro basket.
“The ruble is slowly creeping down as there is no escalation on one hand, but the U.S, are saying they’re ready for new sanctions, which doesn’t improve the mood,” Vladimir Miklashevsky, strategist at Danske Bank A/S in Helsinki, said in e-mailed comments. “The tax period is probably stopping it from a stronger slide.”
While Russia planned to raise as much as 825 billion rubles in debt this year, the ruble’s 7.8 percent depreciation against the dollar in 2014 has helped increased revenue and created a budget surplus equal to 0.7 percent of gross domestic product in the first quarter, according to Finance Ministry data.
“They don’t have any need to borrow, let alone to borrow at any price,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said by phone yesterday. “Even despite a weak economy, they might end the year with a small budget surplus.”
The Finance Ministry has sold 45 billion rubles of OFZ bonds this year and placed a further 100 billion rubles of untradable notes with Russian investors. This compares with OFZ sales of 311 billion rubles in the same period last year.
“I wasn’t surprised that the auction failed” yesterday, Liza Ermolenko, an emerging-markets economist at Capital Economics, said by phone from London on April 23. “Given the recent statements between Ukraine and Russia, it doesn’t look like things are getting better.”
Russian Foreign Minister Sergei Lavrov vowed to defend the country’s citizens in Ukraine yesterday after the government in Kiev said it’s resuming operations to oust militants from eastern cities, weakening investor sentiment.
The U.S. and their allies are ready to “ramp up” sanctions against Russia and its officials if Moscow violates the accord to disarm rebels, signed in Geneva last week, U.S. President Barack Obama said at a news conference in Tokyo.
Russian companies are set to pay as much as 485 billion rubles in taxes this week, including as much as 240 billion rubles in mineral extraction levies, potentially boosting demand for the local currency.
Russian markets may not stabilize before Ukraine holds presidential elections on May 25, according to Yuri Selyandin, a money manager who helps oversee about $2 billion at GHP Group in Moscow.
“Investors are dedicating all of their attention to Ukraine,” Selyandin said in a telephone interview yesterday. “We’re not seeing any positive development.”