Photographer: Andrey Rudakov/Bloomberg

Bond Gamble Turned Cliffhanger Leaves Russia Stung, Bolder

  • Russian debt chief says West applied pressure to stymie sale
  • First Eurobonds since 2013 raised $1.75 billion at 4.75% yield

It wasn’t the eventual rejection by Euroclear Bank SA that came close to upending Russia’s first Eurobond deal in three years.

For the man who orchestrated the $1.75 billion placement, head of the debt department at the Finance Ministry in Moscow, the decision to make the securities ineligible for the international clearing system was the last of the hurdles thrown up as part of what he called “telephone justice,” enforced by Russia’s adversaries in the West to scuttle the sale. The outcome left all sides smarting and flustered, investors baffled and Russia more emboldened than ever.

“It so happened that we were able to test out a completely new structure of issuance, based exclusively on national institutions,” Konstantin Vyshkovsky, 42, said in an interview on Wednesday at his Finance Ministry office a short walk from the Kremlin. “We proved that Russia is able to issue by relying on the strength of national organizations. We intend to adhere to this approach also in the future.”

No one expected it to be smooth sailing. While the sovereign wasn’t subject to sanctions imposed over Russia’s role in the Ukrainian conflict, the Eurobond offering soon turned into geopolitics by another name.

Probing Sentiment

The motivation for Russia was to “probe” investor sentiment and gauge the extent of its access to capital abroad, according to Vyshkovsky, who also led Russia’s return to world markets in 2010 with the first bond sale since the government defaulted in 1998.

Conditions for the placement couldn’t be called favorable,” he said. “From the point of view of market factors, we believe the moment was chosen well.”

The infrastructure of financial markets, with Euroclear at its center, was chosen by the West as the pressure point against the issuer, he said.

“Western financial authorities that chose the tactics of pressure and restrictions understand that it’s far more difficult to pressure investors than organizations providing market infrastructure,” he said. “If foreign investors didn’t want to buy our paper, then it wouldn’t have been necessary to come up with any sanctions and restrictions. Markets would have been de facto closed for us.”

Goldman, Barclays

The offering was contested soon after the Finance Ministry in February invited banks from nine countries to organize the issue. The U.S. warned banks that participating in the sale would run counter to its foreign policy, while the European Union told lenders to be “mindful” of the indirect risks of violating the bloc’s economic sanctions.

The pushback also caught the banks by “surprise,” according to Vyshkovsky. None of the institutions that received Russia’s requests for proposal -- including Bank of China, Goldman Sachs Group Inc. and Barclays Plc -- had declined to take part when initially approached by the ministry.

While not everyone refused, the responses prompted Russia to opt for a domestic organizer, with the offering managed solely by the investment banking unit of sanctioned VTB Group.

“It was decided appropriate to refrain from enlisting any foreigner, even our Chinese partners, whose rejection we didn’t receive,” Vyshkovsky said. “We decided not to create uncomfortable conditions for colleagues.”

New Idea

What followed was a period that required Russia to conduct pre-marketing and consultations with investors away from the public glare. The biggest challenge was that no foreign bank would function as the fiscal agent, handling such duties as redemption of the bonds and settlement. Every candidate for the role rebuffed the offer and Russia’s own National Settlement Depository was ultimately chosen for the role, according to Vyshkovsky.

“For us it became a question that required a greater understanding of whether in these conditions it was possible to speak of issuance,” he said. “And the idea was born: why shouldn’t this be done with Russian institutions?”

The final spurt to the offering announced on Monday went down to the wire, with Russia receiving no “clear position” from Euroclear, Vyshkovsky said. The press service for Euroclear, based in Brussels, declined to comment.

Officials were aware that the ability to process payments through major international payments such as Euroclear is a “serious, decisive” factor for investors, Vyshkovsky said. The company was provided with all necessary documents and its requests were taken into account as much as possible, he said.

Prospectus Caveats

Russia said in the prospectus there could be “no assurance” that the bonds would be eligible for major international clearing systems, adding that none of the proceeds would go to entities subject to U.S. and EU restrictions.

“Everything that happened then is highly regrettable,” Vyshkovsky said. “We saw how colleagues are trying to find any excuse not to say ‘yes.’ But there are no formal, legal reasons not to carry out this transaction.”

The answer -- that Euroclear wasn’t prepared to take part in a primary placement -- arrived when the collection of bids was in full swing, he said.

Bigger Premium

The government issued the 10-year notes at a yield of 4.75 percent on Tuesday, compared with initial guidance of 4.65 percent to 4.90 percent. In addition to the usual premium for new securities, investors received extra for the “unfamiliar” placement, according to Vyshkovsky. The bonds start trading on Friday.

The yield was “more than generous,” said Alexander Morozov, the chief financial officer of Sberbank PJSC. The country’s biggest lender bid for the bonds but wasn’t allocated any, and will consider buying in the secondary market, he said.

Russians accounted for 25 percent of the amount sold, with state banks excluded on purpose, Vyshkovsky said. Demand among outside investors was “solid and real,” and none of it represented Russian money concealed as foreign funds, he said.

Banks bought 55 percent of the issue, while funds and asset managers purchased 34 percent, and insurance companies got 8 percent, the Finance Ministry said in a statement Friday.

While by law Russia can borrow another $1.25 billion this year, there are no such plans at the moment, Vyshkovsky said. It’s an “open question” if the securities will be made eligible by Euroclear in the course of their secondary trading, he said.

“The main thing is that we showed that there’s still considerable demand for Russian instruments and that our national institutions are capable of organizing such deals,” he said.

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