Russia Selling Most Bonds Since Crimea Incursion as Crisis Eases

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An air of normalcy is returning to Russia’s domestic debt market.

The rebound in oil prices, a tentative cease-fire in eastern Ukraine and demand for the highest yields after Brazil in emerging markets have helped President Vladimir Putin’s government cover 74 percent of its debt-sale target for the three months through June 30. That’s the best ratio since the final quarter of 2013, before Russia’s annexation of Crimea triggered international sanctions.

The recovery marks a change in fortunes from 2014, when the Finance Ministry in Moscow scrapped 27 weekly sales as oil nosedived and the ruble tumbled 46 percent. Russia sold 184 billion rubles ($3.4 billion) of so-called OFZ bonds since the end of March, helping it bridge what’s forecast to be its widest budget deficit as a percentage of economic output since 2010. This includes 10 billion rubles of May 2019 bonds sold today.

“It is quite a rapid turnaround,” Richard Segal, the head of emerging-market strategy at Jefferies International Ltd. in London, said by e-mail. “Rates are still higher than the Finance Ministry would like, but this is a good combination for investors: high and stable yields, with a prospect of yield declines leading to capital appreciation.”

The Finance Ministry will hold another auction later today, offering floating-coupon bonds due January 2025.

Bigger Sales

If Russia manages to reach this quarter’s fundraising target, it will be the first time the country has done so since the opening quarter of 2011, according to Finance Ministry data. In that three-month period, the goal was to sell 300 billion of debt.

Issuance targets fell to less than half that amount by the third quarter of 2014 as sanctions over the conflict in Ukraine made borrowing more expensive, leading Russia to rely instead on foreign-currency reserves, which exceeded $400 billion at the time.

Yields on the country’s debt due in May 2019 soared as high as 18.59 percent at the height of Russia’s financial-market crisis in December. The Finance Ministry placed May 2019 bonds at a 10.71 percent weighted-average yield today.

Three interest-rate cuts totaling 450 basis points this year have helped drive demand for Russian bonds, along with the 19 percent rebound in the ruble. Last week’s sale of 10 billion rubles of fixed-rate debt due in January 2028 at a weighted average yield of 10.56 percent received bids valued at three times the amount sold.

While Russia isn’t “out of the woods” yet as companies remain largely locked out of global debt markets by sanctions, surging oil prices and central bank measures to stabilize lenders have attracted buyers, according to Regis Chatellier, a London-based director of emerging-market credit strategy at Societe Generale SA.

“Investors’ view on Russia is now more benign, which has incentivized some investors to return to the Russian bond market, both external and local,” he said.

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