Putin’s Money Beats Sanctions in Russian Bank Bond Market

Bond investors who lost faith in VTB Group when it was saddled with sanctions by the U.S. and European Union missed out on Russia’s best corporate debt rally.

VTB’s dollar-denominated notes due in October 2020 returned 3.5 percent in August, helped by government plans to bolster its capital as the crisis over Ukraine stalls economic growth and stokes a jump in Russian non-performing loans. That’s the best performance among 98 Russian securities in the Bloomberg USD Emerging Market Corporate Bond Index, which gained 1.1 percent.

The government has stepped up support for banks after penalties curtailed their access to dollar and euro funding to punish President Vladimir Putin for his alleged support of Ukrainian separatists. The 200 billion-ruble ($5.4 billion) capital injection for VTB was announced just days before the U.S. and EU threatened new sanctions after NATO said Russian troops moved into Ukraine to help a rebel offensive last week.

“The government has shown its willingness to go deeper into the capital structure of the country’s banks,” Dmitry Poliakov, a senior credit analyst at Sberbank CIB, said by phone Aug. 29. “It’s clearly a positive development.”

Shuttered Markets

VTB’s Tier 1 capital, a measure of financial strength, will exceed 10 percent after the move, compared with 9.4 percent on June 30 and 10.9 percent six months earlier. Profit at Russia’s second-biggest lender slumped 82 percent in the first half.

Delinquent debt at Russian banks jumped 4 percent in July to 1.72 trillion rubles, compared with 1.4 trillion rubles at the start of the year, central bank data show. The economy will contract 0.2 percent in the third quarter, according to a forecast from a Bloomberg survey of 38 economists.

The yield on VTB’s 2020 notes declined 28 basis points last month, even after surging 73 basis points in the last two days amid investor speculation that Russian troop movements within Ukraine could trigger further sanctions.

“VTB is very crucial to the Russian government and the Russian banking system as a whole,” Sergey Dergachev, who helps oversee $10 billion in emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail. Its Chief Executive Officer Andrey Kostin “has almost always had strong support from Putin,” he said.

VTB’s shareholders approved the conversion and placement of preferred shares at a meeting on Aug 29, according to an e-mailed statement today from the lender. The bank’s press office declined to comment when contacted by phone on Aug. 29.

Biggest Constraint

The capital injection comes after Putin signed a law in July allowing the government to use funds from repaid subordinated loans to buy preferred stock in lenders. Russia also bought 39 billion rubles in preferred stock at Russian Agricultural Bank OAO with funds from a state loan taken after the 2008 financial crisis, according to an Aug. 25 statement.

Regulatory Tier 1 ratios represent the “biggest capital constraint” for most Russian banks, analysts at Fitch Ratings in Moscow said Aug. 12. At the same time, capital ratios may come under further pressure in the medium term as lenders increase loan growth, according to the ratings company.

Foreign debt sales by Russian companies have tumbled 67 percent this year from the same period in 2013 to $10.5 billion, the lowest level since 2009, data compiled by Bloomberg show.

Market Test

Alfa Bank, Russia’s largest private lender, said Aug. 19 it may sell a $500 million subordinated bond in September to test international risk appetite for Russian corporate debt. CEO Alexey Marey said the lender is also considering a subordinated loan from state development bank Vnesheconombank.

The ruble weakened 1 percent to a record 37.1235 per dollar on Aug. 29, taking its decline last month to 3.7 percent, the most among 24 emerging-market currencies tracked by Bloomberg. The yield on Russia’s March 2030 dollar bonds jumped 34 basis points in August to 5.01 percent. The ruble slid for a fifth day against the dollar, weakening 0.3 percent to 37.2250 as of 5:23 p.m. in Moscow.

“Investors have decided why not buy VTB bonds if all their capital-adequacy problems are solved,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail on Aug. 29. “Unfortunately, the authorities can’t reduce non-performing loans and increase credit to companies.”

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