Russia Readies $4 Billion Eurobond Swap in Face of Sanctions

  • Bonds maturing in 2018, 2028, 2030 included in debt swap plan
  • Operation aims to reduce volume of debt payments before 2019

Where U.S. Relations With Russia Stand Right Now

Russia laid the groundwork for an operation that will reduce some of its closest and biggest dollar bond payments before the end of the year.

The Finance Ministry has permission to swap up to $4 billion of debt maturing in 2018, 2028 and 2030 into new notes, according to a decree published on the government’s website on Tuesday. The price of the exchange won’t exceed the current market value, according to the decree.

The swap aims to lower Russia’s debt load and servicing costs and reduce the volume of payments owed before 2019, the decree said. Both the 2018 and 2028 bonds were issued in 1998, shortly before the country defaulted on its domestic debt, and have coupons higher than 11 percent, more than double those offered in a bond sold earlier this year. Yields on the sinkable 2030 bond are trading at a record low.

“It makes sense to redeem those bonds in a strong market in advance to lighten the load in 2018,” said Alexey Tretyakov, a money manager at Aricapital Asset Management in Moscow.

Pressure Rising

With a fresh round of U.S. sanctions ensuring the penalties curbing access to foreign capital are here to stay, Russia is under increasing pressure to put its finances in order. While the sanctions don’t prevent the government from issuing new debt, they do block some of the country’s biggest state-owned companies, many of which have dollar bond payments due in the next decade.

One of the goals of the swap is to spread out debt repayments over a longer period but without leaving ownership concentrated among a few investors, Konstantin Vyshkovsky, the Finance Ministry’s debt chief said in an interview last month.

Otkritie Holding, the owner of Russia’s biggest privately held bank, holds 59 percent of the 2030 bond included in the decree, according to a filing on the company’s website. Bank Otkritie FC is in talks over a capital injection, Bloomberg reported last week, citing a person close to the company, as it seeks to calm investor concerns about its financial strength.

“The new notes will most likely have a shorter duration, which will be good for Otkritie’s liquidity,” said Dmitriy Monastyrshin, an analyst at Promsvyazbank PJSC in Moscow.

‘Significantly More’

Although the amount Russia would like to swap is “significantly more than” $4 billion, such an exchange couldn’t be conducted in one year, Vyshkovsky said.

He also warned that the proposed exchange may spook holders of debt purchased before the initial round of Western penalties against Russia, who may be concerned the new notes would run afoul of any curbs. As part of the latest sanctions, the U.S. Senate ordered a report on what impact possible restrictions on state debt or derivatives might have.

Earlier, the ministry said Sberbank CIB, the investment-banking arm of Russia’s biggest lender, and Gazprombank PJSC, the country’s third-largest, may organize the swap after VTB Capital acted as the sole organizer of the recent Eurobond sales.

The swap will probably take place “closer to the fall,” Russian Finance Minister Anton Siluanov said in June. The Finance Ministry didn’t respond to emailed questions on Tuesday about the timing.

— With assistance by Artyom Danielyan, Anna Baraulina, and Jake Rudnitsky

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