Auction Bombs as ING Awaits Central Bank Clarity: Russia Credit

Russia had its worst result this year for an auction of longer-dated bonds as ING Groep NV said investors await clarity on central bank policy after President Vladimir Putin nominated a new chairman.

The government sold 1.89 billion rubles ($61 million), or 22 percent, of the securities maturing in July 2022 at an average yield of 6.87 percent, the Moscow Exchange said in a statement yesterday. That’s the top end of the Finance Ministry’s guidance and compares with a rate of 4.82 percent for similarly rated Mexican debt maturing in June of the same year.

Putin on March 12 nominated Elvira Nabiullina, his current economic aide and a former economy minister, to run Bank Rossii when current Chairman Sergey Ignatiev’s term expires in June. The “uncertainty” over what the appointment means for policy on inflation targeting compounded the Finance Ministry’s “aggressive” pricing for the sale, according to Dmitry Polevoy, an analyst at ING Groep NV in Moscow.

“There is now less certainty, at least until Nabiullina assumes her post and takes her first steps, as to why you should buy OFZs, especially long-term securities,” he said by e-mail.

The government sold all 4.21 billion rubles of five-year bonds on offer at a second sale yesterday after reducing the offering from 20 billion rubles. The government placed about 27 percent of an offering of 2023 debt on January 16, according to Finance Ministry data.

Konstantin Vyshkovsky, the Finance Ministry’s debt department head, was unavailable for comment yesterday.

Growth, Inflation

Nabiullina will probably be more focused on economic growth, with “aggressive” rate cuts risking an acceleration of inflation, UralSib Financial Corp. analysts led by Vyacheslav Smolyaninov said in an e-mailed report. Bank Rossii may reduce borrowing costs by 50 to 75 basis points, they said.

Potential easing increases pressure on the ruble and “might curb non-residents’ interest toward ruble instruments,” the analysts said.

Putin’s nomination will have to bridge a gap between Bank Rossii’s efforts to fight rising prices, as the regulator moves toward inflation targeting by 2015, and government calls for monetary easing to spur growth. The bank’s reluctance to cut interest rates has sparked a “huge argument” with the government, First Deputy Prime Minister Igor Shuvalov said in a Jan. 18 interview.

Rates Meeting

Inflation accelerated to 7.3 percent in February, according to the state statistics service. Bank Rossii directors will leave rates unchanged at a meeting tomorrow, according to a Bloomberg survey of 28 economists. Policy makers held the refinancing rate at 8.25 percent for a fifth month in February, warning of the threat of faster inflation and defying government calls for lower borrowing costs.

The ruble gained 0.1 percent against the dollar to 30.75 by 7:19 p.m. in Moscow after weakening 0.3 percent the day before. The yield on the country’s dollar bonds due in April 2042 rose two basis points to 4.74 percent. The yield on Russia’s ruble Eurobond due in 2018 was little changed at 6.10 percent.

Russia is ranked BBB by Fitch Ratings, the second-lowest investment-grade category. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell one basis point to 181, according to JPMorgan indexes. The difference compares with 168 for debt of Mexico and 169 for Brazil.

Cost Protection

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was little changed at 140 basis points, according to data compiled by Bloomberg. The swaps cost 10 basis points more than Turkey, which is rated one step lower by Fitch at BBB-. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The Finance Ministry is unlikely to change its strategy at auctions in the coming months, according to Vladimir Kolychev, head of research at Societe Generale SA’s OAO Rosbank unit in Moscow. If demand fails to improve, the ministry may be compelled to offer more generous premiums, he said by e-mail.

“While the nomination didn’t play a decisive role, it certainly may have added to arguments in favor of waiting to buy longer-term OFZs in expectation of clearer signals from the new central bank head,” he said.

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