Russia Seeks Eurobond Pledges After Painful Past With Banks

  • Vyshkovsky: another snub by banks would hurt Russia’s image
  • Eurobonds have rallied with ruble on oil, sanctions optimism

After last year’s snub by foreign banks, Russia plans to make its next Eurobond sale rejection-proof.

When Konstantin Vyshkovsky formally approaches potential foreign organizers of Russia’s Eurobond sale this year, the head of the Finance Ministry’s debt department will do so safe in the knowledge that they’ve already agreed in private to apply. 

Konstantin Vyshkovsky

Photographer: Andrey Shevchenko/Ministry of Finance

“The simple fact of a rejection from some banks is bad for Russia’s image,” Vyshkovsky said in an interview in Moscow on Tuesday. “We’ll be sending the offer to those who have already confirmed their desire to participate.” 

Vladimir Putin’s government is taking the precautions after banks, including Goldman Sachs Group Inc., last year steered clear of its first test of international debt markets under U.S. and European sanctions. Russia eventually drove through a $1.75 billion placement via a single state-run bank in May, with international clearing houses only agreeing to handle the debt two months later.

Donald Trump’s election win in the U.S. may have improved the backdrop for a sale in 2017, according to Vyshkovsky. Trump, whose shock election spurred a rally in Russian assets, has called for better relations with Putin and has left open the possibility of easing the sanctions against Russia.

Goldman, Euroclear

“It’s possible that the external environment for the sale will be better this time," Vyshkovsky said. “We’re not going to wait for the easing or lifting of sanctions in order to come out with a Eurobond sale this year.”

After the U.S. government’s admonishments last year, Goldman and at least five other American lenders Russia had approached to underwrite the bonds dropped out of the bidding process. Some of the biggest European and U.S. asset managers also stayed away from buying the new Eurobond since the instrument wasn’t immediately accepted for clearing by Euroclear Bank SA, the world’s biggest clearing house.

While Vyshkovsky didn’t suggest when a sale might happen, Finance Minister Anton Siluanov has said it may come in the spring. There’s a 55 percent chance that the ministry will offer debt by the end of April, according to a survey of 16 economists conducted last week by Bloomberg. Russia won’t wait for sanctions to be revoked before proceeding with the offering, 94 percent of respondents said.

Russia sold an additional $1.25 billion of the 2026 bond in September, and the note has rallied this year, cutting the yield 34 basis points in the period to 4.12 percent as of 5:43 p.m. in Moscow on Wednesday. Local-currency bonds have handed investors a 18 percent return since November, the second-best in emerging markets, as OPEC’s production-cut deal buoyed the price of oil.

Ruble Rally

Though a growing share of non-residents in local bonds is a “concern,” there are no plans to limit their investments, Vyshkovsky said on Tuesday. Foreigners owned 27 percent of Russia’s ruble-denominated debt as of Jan. 1, according to central bank data released Wednesday.

A bigger danger is posed by ruble debt with a floating-rate coupon, which could bring a “potentially sharp increase in the burden on the budget,” he said.

Vyshkovsky said the ruble’s 5.7 percent surge this year is due to “one-off” factors and he doesn’t predict “long-term” appreciation. “There are no macroeconomic reasons for that.”

For now, the Finance Ministry is looking to the Eurobond sale. The lenders picked to manage the sale would also have to organize a deal that would enable investors to swap old foreign bonds for new ones, which could happen at the same time as the placement, Vyshkovsky said. The swap may involve bonds due in 2018, 2028 and 2030.

The ministry will send its proposal to only invite banks that have agreed to participate in the sale for government approval “in the coming days,” Vyshkovsky said. “Having overseas banks as organizers of the Eurobond deal is of course positive for foreign investors.”

— With assistance by Olga Voitova, Andre Tartar, and Paul Abelsky

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