Russia Snubs U.S. Sanctions Threat With Dollar-Bond Return

Updated on
  • Government said to plan sale of 10-year, 30-year Eurobonds
  • Bonds climbed nine basis points after U.S. sanctions vote

Russia is tapping international bond markets for the first time this year, betting demand from yield-starved investors will eclipse the prospect of tougher U.S. sanctions.

Initial price guidance on 10-year notes is for a yield in the low- to mid-4 percent range and the low- to mid-5 percent range for 30-year debt, according to a person familiar with the matter, who wasn’t authorized to speak publicly about the deal and asked not to be identified. Unlike last year’s bond, which wasn’t admitted by Euroclear SA until two months after its sale, this year’s benchmark-sized offering will be immediately available for international clearing and is expected to be priced on Tuesday.

The dollar-bond sale, again managed solely by state-controlled VTB Capital, is the first new issuance from the Russian government since its return to foreign debt markets under sanctions a year ago. That deal was shunned by some of the biggest global investors and wasn’t initially endorsed by international clearing houses or banks. The latest offering comes after the U.S. Senate on Wednesday voted overwhelmingly to expand sanctions against Russia amid a probe into its alleged meddling in last year’s presidential election.

Ogeday Topcular, who helps oversee $300 million as a managing partner at RAM Capital SA in Geneva, said that while the move makes him “anxious” about U.S. attitudes to Russia, he’s likely to participate in the sale.

“I don’t think they’ll have a problem selling these bonds as they’re cheap and the supply from Russia is limited,” he said. “Foreign investors could not get enough from the last Eurobond sale because of the settlement issue.”

Investors are hungry for the yields on offer in emerging markets as an alternative to near-zero interest rates in the U.S. and Europe. The premium demanded to hold Russia’s 2023 sovereign dollar bonds over U.S. Treasuries has dropped by almost 100 basis points in the past year, narrowing the spread to 151 basis points on Monday in Moscow.

Investors including BlackRock Inc. and Amundi Asset Management have said they would consider buying the new debt. While Russia’s government isn’t affected by Western sanctions that block many of the country’s state companies from accessing international debt markets, U.S. officials warned last year that the funds raised through a sovereign sale could be passed on to entities that have been hit by the penalties. The proceeds from the new sale will be used for general government purposes that won’t violate U.S. and EU sanctions, according to the person familiar with the deal.

Read More: Russia Finds Way Back to Eurobond Market Is Rife With Potholes

Donald Trump’s election initially raised hopes that sanctions might be eased this year, but the thaw he promised has been sidelined by a U.S. investigation into Russia’s alleged hacking of the election that swept him to power. Yields on Russia’s foreign debt due in May 2026 climbed nine basis points after the Senate vote on Wednesday.

If passed, the president would no longer be able to ease or lift sanctions without approval from Congress. The deal would also add additional restrictions to the ability of banks and energy companies to raise capital, and allow for new sanctions on state-owned entities in the rail, shipping, metals and mining sectors, as well as pipelines.

The yield on Russia’s $3 billion bonds due 2026 was at 4.08 percent as of 3:59 p.m. in Moscow on Monday. Russian sovereign dollar debt has handed investors a return of 4.2 percent this year, compared with 8.4 percent for Brazil.

“I certainly will have a look at it,” said Ronald Schneider, a fund manager at Raiffeisen Kapitalanlage GmbH in Vienna. “Compared to the last Eurobond issue, when some questions related to euroclearability had been open, this time the issue should attract more foreigners.”

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