Moscow’s 160 Billion Ruble Plan Revives Benchmark: Russia Credit

Moscow plans to sell as much as 160 billion rubles ($4.8 billion) of bonds by year-end, betting its re-emergence as the benchmark for Russian regional debt sales will lead to lower borrowing costs.

Russia’s capital city intends to sell 40 billion rubles of bonds on Oct. 3 and may offer 120 billion rubles more by Dec. 31, according to the Moscow finance department website. The yield on its three-year bonds due June 2016 fell nine basis points to 7.42 percent since the first day of trading, compared with a drop of 91 basis points for January 2017 euro debt of Madrid, ranked the same at Fitch Ratings.

Moscow came to the debt market for the first time since 2010 in June as Mayor Sergei Sobyanin sought to plug a deficit with social spending rising and tax revenue from oil companies being transferred to producing regions. During the city’s absence on the market, regions have had to use federal government bonds to gauge pricing of debt.

“Moscow is the biggest, richest municipal borrower, hence it can command the lowest yield,” Konstantin Nemnov, who helps manage the equivalent of $2.4 billion in debt at TKB BNP Paribas Investment Partners in St. Petersburg, said by e-mail Aug. 14. “What happens to Moscow will affect all other municipal borrowers, making it a benchmark for all.”

Regional Access

Regions including Novosibirsk and Stavropol are preparing debt sales as President Vladimir Putin’s administration is broadening access to the nation’s markets. Euroclear Bank SA, the world’s biggest settlement system, plans to begin operations with regional debt as early this year after a start to transactions with government bonds in February. Clearstream International SA began handling municipal debt in May.

Sobyanin, now acting mayor as the city prepares for elections, controls a $52.4 billion municipal budget, the biggest after Shanghai and New York, according to Moscow’s website. Moscow shares the state’s BBB credit rating from Standard & Poor’s and Fitch. It plans to offer four bonds issues in the fourth quarter, each for 40 billion rubles, with terms of as long as seven and a half years.

“Our rating is the same as the Russian Federation and thanks to our stable and efficient system, I’m confident that investors will value our bonds as the safest after sovereign bonds,” Alexander Kovalenko, deputy head of the municipal government’s finance department, said by phone Aug. 13.

Direct Elections

Sobyanin, a former head of the Kremlin administration, is leading the polls for the Sept. 8 election, which will see the mayor being elected directly for the first time in a decade. Opposition leader Alexei Navalny is second place, according to the research company Levada Center.

“A victory for somebody outside of the establishment, such as Alexei Navalny, would at least initially be very bad for the bond market,” Chris Weafer, a senior partner at the Moscow-based consultancy Macro Advisory, said by e-mail yesterday. “Investors hate uncertainty. Bond issuance would cost the city a lot more in that event.”

The yield on Russia’s dollar bond maturing in March 2030 fell three basis points, or 0.03 percentage point, to 4.10 percent by 2:01 p.m. in Moscow. The extra yield investors demand to hold Russia’s dollar debt rather than Treasuries dropped one basis point to 216, according to JPMorgan Chase & Co. indexes.

Sub-federal borrowing doubled last year and may grow by 50 percent to 100 percent this year, not including Moscow, according to Anton Tabakh, an analyst at UralSib Financial Corp. The Moscow sale will probably succeed as there’s a shortage of high-quality debt on the market, access for foreign investors has been liberalized and the city has the same rating as the sovereign, he said by phone on Aug. 13.

“Now that Moscow’s back with big volumes, I expect it will re-emerge as the benchmark,” Tabakh said.


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