Lehman Freeze Evoked as Bond Sale Scrapped Again: Russia CreditVladimir Kuznetsov
Russia canceled its eighth bond sale this year as Finance Minister Anton Siluanov said the nation is facing the toughest conditions since 2008, when Lehman Brothers Holdings Inc.’s collapse sparked the financial crisis.
Yields on local currency 10-year bonds jumped 84 basis points since Russia’s incursion into Ukraine’s Crimea region at the start of March. Rates on similar-maturity securities of Turkey, ranked one level below Russia at Fitch Ratings, fell 34 basis points in the period.
Russia is being frozen out of government bond markets after President Vladimir Putin’s annexation of Crimea drove relations with the U.S. and Europe to a Cold War low. The economy may not grow this year, with “considerable geopolitical risks” the main driver of Russian capital outflows, Siluanov said at a ministry meeting yesterday.
“The market has no interest in government bonds at all,” Anton Nikitin, an analyst at VTB Capital in Moscow, said by e-mail yesterday. “Local players have no interest due to the narrow spread. I don’t think foreigners have any interest in increasing exposure to Russian risk with headlines like these. Geopolitical uncertainty is determining everything at the moment.”
Lehman’s failure in September 2008 helped trigger a global recession, which sent the Russian economy into five straight quarters of contraction as commodity prices plunged. The ruble has dropped 9 percent this year against the dollar, compared with a 12 percent slump in the same period of 2009.
Ukraine’s Kiev-based government started a military-backed “anti-terrorist” operation in its eastern Donetsk region after fighting between its forces and pro-Russian separatists turned deadly this week. The U.S. and the European Union are deliberating tougher sanctions against Russia, which they blame for stoking the unrest, as President Barack Obama and Putin remained at odds over who was at fault.
The Finance Ministry has raised 45 billion rubles ($1.2 billion) on the open market since the beginning of the year, compared with its full-year target of 808 billion rubles. It also sold 100 billion rubles of non-tradable securities to pension funds in March.
Inflation accelerated to 6.9 percent in March from 6.2 percent the month before as a weaker ruble made imports more expensive. While the central bank is targeting an inflation rate of 5 percent this year, Chairman Elvira Nabiullina said March 27 inflation may be between 5 percent to 6 percent.
The pace of price growth means it’s unlikely the central bank will reduce an emergency 150 basis-point rate increase at the start of last month, which was aimed at curbing stronger declines in financial assets, Nikitin said.
While a weakening ruble drives up the cost of imports and fuels inflation, it’s also bolstering receipts from exports of commodities, typically priced in dollars.
The oil and gas industries contribute about 50 percent of Russia’s revenue. The nation’s budget surplus was 110.1 billion rubles in the first quarter, the Finance Ministry said April 11. That’s equivalent to 0.7 percent of gross domestic product.
“They can sit out until the end of this year without new borrowings,” Konstantin Artemov, a money manager at Raiffeisen Capital in Moscow, said in e-mailed comments.
The government won’t sell bonds when yields are too high, Siluanov said on April 1 after Russia announced a second-quarter borrowing plan of 150 billion rubles, 50 percent smaller than the same period last year.
The yield on Russia’s 10-year securities declined for the first day in four, falling three basis points to 9.15 percent as of 3:41 p.m. in Moscow. The rate reached 9.79 percent on March 14, the highest since October 2009.
“The current rates are still too expensive for them,” Yulia Safarbakova, an analyst at BCS Financial Group, said by e-mail yesterday. “That’s as long as the budget is in surplus” no other territories join Russia and the oil price stays high, she said.
The government considered a “slight” increase in borrowing to fund its newly annexed Crimea region, First Deputy Prime Minister Igor Shuvalov said in a Forbes interview on April 13. Russia has decided to dip into its rainy-day wealth funds next year to find at least 130 billion rubles to finance the region, according to four people with knowledge of government discussions who asked not to be identified as planning is confidential.
Oil has climbed 6.9 percent this year to $104.76 a barrel yesterday in New York.
“In current market conditions you have to offer a significant premium for investors to buy new issues,” Igor Golubev, head of fixed income research at OAO Promsvyazbank, said by phone from Moscow. “The Finance Ministry is not ready to do this.”