Putin’s Surplus Seen in Rejection of Bond Market: Russia Credit

Russia canceled its sixth weekly debt sale yesterday, its longest absence from fundraising in four years, as oil revenue gave the government slack to keep sidestepping higher borrowing costs.

The world’s largest energy exporter posted a 675 billion-ruble ($19 billion) fiscal surplus in the first seven months of 2014, damping concern that widening U.S. and European sanctions threaten it with a deficit. The ruble’s 9.1 percent decline against the dollar this year helped boost proceeds from oil, which has averaged about $108 per barrel in London. Energy sales make up 50 percent of Russia’s revenue.

“Russia still has a lot of ‘cushion’ to burn,” Luis Costa, the head of foreign-exchange and local-markets strategy for central and eastern Europe, the Middle East and Africa at Citigroup Inc. in London, said by e-mail yesterday. “The Finance Ministry can withhold months of potential supply.”

The ministry has refrained from offering ruble-denominated bonds since a sale on July 16, before U.S. and European Union penalties limiting Russian companies from accessing funds abroad sent the yield on the government’s 10-year bonds to a record 9.90 percent on Aug. 6. That compares with 8.31 percent before President Vladimir Putin’s March incursion into Ukraine’s Crimea peninsula sparked the worst emerging-market selloff in the debt.

Yield Demands

Russia pulled the sale as Putin and his Ukrainian counterpart Petro Poroshenko met in Minsk, Belarus to try to ease tension between the two countries after five months of separatist unrest. The talks were “positive,” Putin said early today. The drought in bond offerings is the longest since June 2010, and takes to 14 the number of pulled sales this year, according to Finance Ministry data.

The government has scaled back on issuing since Finance Minister Anton Siluanov said April 1 the country won’t raise cash when borrowing costs are too high. The country offered 224 billion rubles this year of local notes known as OFZs and untraded government savings securities, less than 30 percent of its initial 808 billion-ruble 2014 target.

The yield on government bonds due February 2027 increased one basis point to 9.33 percent at 6 p.m. in London, while the rate on 10-year notes climbed four basis points to 9.36 percent.

Funding Needs

Borrowing will be limited unless yields drop below 9 percent across the curve, according to Oleg Kouzmin, an economist for Russia and the Commonwealth of Independent States with Renaissance Capital in Moscow. To compensate, Russia can reduce the amount of cash it transfers to its reserve fund, “fairly easily” keeping local fundraising to a minimum, he said by e-mail yesterday.

While the government can manage its 323 billion-ruble refinancing needs this year with its surplus, it will need to redeem 62 percent more in 2015, according to Dmitry Dudkin, the head of fixed-income research at UralSib Capital in Moscow.

The country has drawn down its foreign-exchange and gold reserves by $42 billion this year to $469 billion as of Aug. 15, according to data compiled by Bloomberg. The price of Brent crude has declined 3.2 percent this month.

“At the moment the risk is not too high, but it cannot continue for a long time,” Ogeday Topcular, who oversees $300 million of assets at RAM Capital SA in Geneva, said by e-mail. “They need to do the auction sooner rather than later. Most probably, they will wait for liquidity.”

No Sales

Russian local-currency notes slumped 7.9 percent in dollar terms this quarter, the most among 31 members in the Bloomberg Emerging Market Local Sovereign Index. Bonds extended declines after the Bank of Russia raised its main rate by 50 basis points to 8 percen July 25 to shore up markets shaken by sanctions.

The ruble strengthened 0.2 percent to 36.04 per dollar today, trimming the third-worst retreat this year among 24 developing nations monitored by Bloomberg. Brent crude rose 0.3 percent to $102.81 per barrel.

“With the current price of oil and weakened ruble, we get a budget surplus which allows the government to not sell any more bonds this year,” Dudkin of Uralsib said by e-mail yesterday.

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