Russia Goes It Alone With First Eurobond Since Sanctionsby , , and
VTB sole organizer of sale after foreign banks warned away
Potential settlement, compliance risks concern some investors
Struggling to cover a widening budget gap, Russia is selling its first Eurobond since being hit with international sanctions two years ago, with state bank VTB Capital as the sole organizer of the deal after the U.S. and European Union warned foreign banks against participating.
Russia said in the prospectus Monday that none of the proceeds would go to entities subject to U.S. and EU restrictions. But there were still questions about whether foreign investors would be able to trade the bonds easily. The prospectus said that there could be “no assurance” that the bonds would be eligible for major international clearing systems, such as Euroclear Bank SA and Clearstream Banking SA, on which many foreign funds rely.
"It will be a case-by-case basis whether investors will be able to participate on the primary market,” said Sergei Strigo, who helps oversee $3.5 billion in emerging-market assets as a money manager at Amundi Asset Management in London. “Everyone has their own compliance department and it’s up to them to give them the go-ahead."
The initial price guidance on the 10-year dollar-denominated notes is a yield of 4.65 to 4.9 percent, according to people familiar with the matter, who weren’t authorized to speak publicly about the deal and asked not to be identified. That’s a modest premium above the 4.02 percent yield for Russia’s September 2023 Eurobond. The Finance Ministry didn’t indicate how large the issue would be, but this year’s budget authorizes as much as $3 billion.
VTB Capital had received $5.5 billion of bids for the bonds as of Monday evening in Moscow and final pricing is expected tomorrow, the people said. Some administrative issues are still being worked out and the organizer will consider Asian investors early Tuesday, they said.
Beyond raising cash, the deal could have important symbolic value for the Kremlin, which has sought to minimize the impact of sanctions since they were imposed in 2014 over the conflict in Ukraine.
“For Moscow this is not about the money, it is about the messaging of undermining and eroding sanctions,” said Tim Ash, head of emerging-market strategy at Nomura International Plc in London. EU officials are expected to extend the restrictions next month or in early July.
Russia’s attempt to find underwriters for the Eurobond in February failed after warnings from the U.S. and EU led banks including Goldman Sachs Group Inc. and Deutsche Bank to drop out of the bidding process. Russian officials had said they wanted prominent U.S. or European banks involved to ensure the success of the issue and had shelved the plans when it became clear they wouldn’t join. The Finance Ministry declined to comment Monday on the timing of the placement.
“Even if a number of international investors can’t or won’t buy the issue for whatever reason, there’s probably sufficient local demand,” said Peter Kisler, who runs an emerging-market fund at hedge fund North Asset Management, with $1 billion under management. “We are going to participate depending on the pricing,” he added. “At the current levels, which is about 50 basis points cheaper than the curve, it’s fairly attractive.”
But the unusual settlement terms could be a deterrent to many potential buyers outside Russia, particularly if the securities aren’t eligible for Euroclear or Clearstream. “The settlement is potentially going to be an issue both for foreign investors and international banks trading it,” said Richard Segal, a London-based emerging-market analyst at Manulife Asset Management, via e-mail. Russia’s previous Eurobonds can be settled through those systems, easing access for foreign investors.
Russia’s existing Eurobonds have handed investors 6.9 percent this year, as the recovery in oil has spurred investor appetite for assets of the world’s biggest energy exporter. The yield premium investors demand to hold Russian 2023 dollar bonds over Treasuries is 256 basis points, compared with about 190 basis points at the time of the 2013 sale. That offering included four parts, with a $3 billion of 10-year securities yielding 5.112 percent.
Russia needs cash to finance its widest budget shortfall since 2010 after the price of oil, its biggest export earner, fell 56 percent in the past two years. The country’s economy is in its second year of recession and remains isolated by sanctions that have barred its biggest companies from foreign capital markets. Efforts to boost the amount the government gets from big state companies in the form of dividends have run into opposition from the companies.
Investors have demonstrated a taste for more exotic bond sales this year. Argentina raised $16.5 billion in its first Eurobond since its 2001 default after receiving bids for four times that amount. Saudi Arabia is preparing its debut foray into international debt markets as its neighbors, including Abu Dhabi in April and Qatar later this week, end a dearth of issuance from the oil-exporting region.
Sovereign dollar and euro bond sales from emerging markets have reached $65 billion this year, more than half of last year’s volume, according to data compiled by Bloomberg.