Russia Selling Eurobond in Show of Defiance Amid U.K. Reprisals

Updated on
  • Government offers ~30bps premium to sovereign yield curve
  • Bonds, ruble slip as U.S. sanctions Russian individuals

Russia is snubbing international condemnation over the poisoning of a former spy on British soil and pushing ahead with a Eurobond sale even as a diplomatic spat escalates.

The announcement of a benchmark dollar-bond placement comes less than 24 hours after U.K. Prime Minister Theresa May unveiled measures including the expulsion of 23 diplomats. Bonds and the ruble slid after France and Germany called for Russia to explain itself in connection with the attack, and the U.S. sanctioned individuals over alleged meddling in the 2016 presidential election.

“The timing is fairly deliberate as a show of strength,” Kieran Curtis, a money manager at Aberdeen Standard Investments in London, said before the announcement. Curtis, who helps oversee about $14 billion, has an overweight position on Russian debt and said he would consider buying the new issue.

If demand for the sale is strong, it could give a lift to President Vladimir Putin before elections on Sunday and as the Kremlin prepares retaliatory measures against the U.K. It may also provide shelter for Russian money currently being stashed in the U.K. because the Finance Ministry has said it will give priority to local investors willing to repatriate funds.

May told Parliament Wednesday that the U.K. will also move to freeze Russian state assets in response to what she called an “unlawful use of force” involving a weapons-grade nerve agent. Russia said it’s preparing retaliatory steps against the “crazy accusations.”

Muscle Flexing

Initial price guidance on the 11-year notes the Finance Ministry plans to sell is for a yield in the 4.75 percent range, according to a person familiar with the matter who wasn’t authorized to speak publicly about the deal and asked not to be identified. That’s a premium of about 30 basis points over the yield curve.

Russia has also been collecting bids from investors seeking to swaps bonds maturing in 2030 for notes maturing in 2027, 2047 and new obligations.

Russia’s borrowing costs have ticked up this month but are still near the lowest in more than four years after S&P Global Ratings upgraded the country to investment grade last month. A likely Federal Reserve interest-rate hike next week is pushing emerging-market issuers including South Africa to sell now before borrowing costs rise.

“Russia is flexing its muscles but at the cost of a higher yield,” said Richard Segal, a senior analyst in London at Manulife Asset Management. “Some may pass due to the geopolitical situation and therefore the yield may be higher than otherwise.”

(Adds chart after second paragraph, details of yield premium in sixth paragraph.)
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