Russia Sees Yields Flat Despite Doubled Debt Issuance Next Year

  • Deficit to be mostly financed by debt by 2019, Vyshkovsky says
  • Ministry will rely on local infrastructure in future Eurobonds

Russia’s Finance Ministry is confident it will be able to double domestic borrowing in 2017 from this year’s record level without pushing yields higher, betting that local banks will have enough spare cash to invest.

The ministry also plans to issue as much as $3 billion in Eurobonds relying on the local financial infrastructure it used in 2016 to get around obstacles posed by Western sanctions, Konstantin Vyshkovsky, head of the debt department, said in an interview. Another $4 billion is planned to swap for outstanding Eurobonds, he said.

“Thanks to sanctions, we developed our own placement format, independent of foreign banks,” he said, showing off an early Soviet propaganda poster of Red Army soldiers hoisting a fat cat capitalist on their bayonets, with its caption updated to highlight the ministry’s Eurobond victory over the “Gosdep” -- the U.S. State Department. 

“The strategic goal is for the National Settlement Depository to become for foreigners a de facto Russian version of Euroclear or Clearstream,” he added.

More Borrowing

With the economy recovering and demand for Russian debt still strong, the government wants to make market borrowing the main source of funding for the deficit, sharply reducing reliance on the rainy-day fund that has covered most of the gap over the last few years, Vyshkovsky said. By 2019, the ministry plans to cover 90 percent of the deficit with borrowing, up from about 20 percent this year, he said. The government wants to reduce the deficit to 1 percent of GDP in 2019 from about 3.7 percent this year. The borrowing would include a mixture of more domestic sovereign debt, including retail bonds for households, as well as OFZ in yuan and Eurobonds.

The most ambitious element of next year’s program is the expansion of net local OFZ issuance to about 1 trillion rubles, up from 500 billion this year. Vyshkovsky described that as “a challenge” but said between slowing inflation, falling rates and surplus cash at banks, the market will be able to absorb the added supply without pushing up yields. Weekly auctions will rise to between 30 billion and 40 billion rubles from the average of 20 billion this year.

Andres Vallejo, an investor at National Asset Management Co. JSC, said, “there are a lot of rubles and with no place to invest them, because the economy is shrinking and investments are falling, and the Finance Ministry can assume that banks will bring that cash into OFZ among other places.”

Local investors prefer floating-rate paper, Vyshkovsky said, but the ministry will limit its share in overall debt to about 20 percent of the total from about 16 percent now.

Foreign Demand

For foreign investors, Russian ruble debt has delivered a 35 percent return this year, the second highest in the Bloomberg Emerging Market Local Sovereign Index. Vyshkovsky said the ministry expects foreign demand for OFZs to remain steady next year. Foreign ownership is now just short of 27 percent, a record high, according to the central bank.

The ministry is planning to hold net Eurobond issuance unchanged next year. In 2016, many officials feared U.S. and European Union sanctions would effectively close the market, as western banks refused to participate. But the Finance Ministry succeeded in placing $1.75 billion in May, using a local bank as sole organizer and domestic settlement infrastructure. Euroclear SA agreed to clear the Eurobonds in July, two months after their sale, alleviating foreign investors’ concerns, and making it easier for the Finance Ministry to sell another $1.25 billion in September.

In addition to the $3 billion in new Eurobond issuance next year, Vyshkovsky said the ministry plans to offer as much as $4 billion in new bonds for investors to swap for existing, illiquid issues. “It would be ideal if we could conduct the exchange and a new issue simultaneously,” he said, since both operations require favorable market conditions. He said the exact timing and other details of the swap haven’t been decided yet.

Russia also will push ahead with plans to issue OFZ denominated in yuan in 2017, he said. Hopes of making that placement this year didn’t materialize because of regulatory delays on the Chinese side.

“It makes sense to develop this instrument even if geopolitical tension is reduced,” he said.

    Before it's here, it's on the Bloomberg Terminal.