Russia Is First Out the Blocks After Fed With Eurobond Tap

  • Foreign banks avoided Russia’s previous sale amid sanctions
  • 2026 bond yield down almost one percentage point since issue

Russia, besieged by international sanctions, is back in the Eurobond market.

Less than a day after the U.S. Federal Reserve kept interest rates unchanged and scaled back its projections for increases in 2017, Russia offered investors $1.25 billion of 4.75 percent bonds in a tap of the 2026 notes it sold in May, according to the Finance Ministry. The Eurobonds were priced at 106.75 percent of face value, the ministry said.

The sale was Russia’s second this year as it wrestles with recession and the deepest budget deficit in more than half a decade. While the Finance Ministry’s Eurobond return in May was boycotted by foreign banks and some investors, the new offering will be available for settlement via Euroclear Bank SA and comes as stocks and bonds climbed around the world on Thursday after the Fed kept monetary policy accommodative. U.S. investors bought more than half of the bonds, according to Finance Minister Anton Siluanov.

“The timing is fortuitous,” Richard Segal, a senior analyst at Manulife Asset Management in London, said by e-mail. “The first sovereign out of the blocks after the Fed statements and we all breathe a sigh of relief about Euroclear.”

Overseas lenders avoided signing on as organizers of the previous placement after warnings from the U.S. and the European Union that the deal could violate sanctions imposed on some of Russia’s largest companies over its role in the Ukraine crisis. Euroclear, which runs the world’s biggest bond settlement system, didn’t clear the notes until two months later.

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Investors submitted bids worth more than $3 billion two hours after the books were opened, according to a person familiar with the deal who wasn’t authorized to speak publicly and asked not to be identified. Initial yield guidance on the notes is 3.99 percent and the sole organizer is VTB Capital, the investment banking arm of Russia’s second-biggest lender, the person said.

Russian bonds rallied in unison with markets around the world on Thursday as the Fed’s decision signaled an era of cheap money has further to run. The yield on the May 2026 bonds has tumbled by almost one percentage point since their sale, while the spread between the debt and similar-maturity U.S. Treasuries has shrunk to 238 basis points from as high as 316 in July. The bonds climbed for a fifth day on Thursday, reducing the yield four basis points to 3.82 percent, the lowest in more than two weeks.

‘More Comfortable’

Anton Hauser, a money manager in Vienna who helps oversee $2 billion at Erste Asset Management, and holds dollar and euro Russian debt, said he’s most likely going to participate in the sale. With debt sales forecast from the Middle East, Pavel Mamai, the co-founder of hedge fund Promeritum Investment in London, says Russia is right to get to the front of the line.

“The market just rallied after yesterday’s Fed decision so it is a very good sentiment for a new placement,” said Mamai, who bought the original 2026 bond. “Later, a lot of sovereigns from the Middle East are expected to print, so you want to be ahead of them.”

While the new offering exhausts Russia’s limit of $3 billion for overseas sales this year, the Finance Ministry may increase its cap on borrowing next year, according to Capital Economics analyst Liza Ermolenko. The Finance Ministry had an upper limit of $7 billion on its overseas debt sales before Russia’s annexation of Ukraine’s Crimea peninsula in 2014 triggered sanctions and drove up borrowing costs.

“In May I think most foreign investors stood on the sidelines, uncomfortable with the lack of a sign-off from Euroclear plus uncertainty as to how Western regulators would view their involvement,” said Tim Ash, an emerging-market strategist at Nomura. “This time around, post the Euroclear decision to accept these bonds in its systems, and perhaps having seen others lead the way, foreign investors now seem much more comfortable getting involved in this deal.”’

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