Gadfly

Russia Plays It Safe

Bowing to pressure now to keep capital markets open tomorrow.
From
Andrey Rudakov/Bloomberg

Russia's new bond sale on Friday didn't go quite as smoothly as Vladimir Putin's reelection as president on Sunday. But it was close.

With $7.5 billion of orders from 170 investors for $4 billion of debt this was a carefully managed success. It was most certainly not a barnstormer. But that doesn't matter -- the main point is that, for Russia, global capital markets remain open. 

The modest tightening in spreads on Monday suggests the issuer offered the correct amount -- any more would probably have created indigestion in the secondary market. But the deal looks smaller than it could have been, had the government not been embroiled in a diplomatic row over the poisoning of a former Russian agent and his daughter in England. There was also some pressure to ensure a success and avoid embarrassing Putin two days before Russians went to vote, even though his victory was pretty well assured.

The $1.5 billion 11-year bond launched at a yield of 4.625 percent, and is now seven basis points lower. This has not eliminated some but not all of its 20 basis point new issue premium.

The yield on the the existing 2047 bond that Russia increased by $2.5 billion is two basis points lower, marking a modest tightening in spread to the U.S. 30-year benchmark. This deal is now $7 billion in size, and will form a bigger part of emerging market bond indexes. So it's perhaps a bit surprising that it hasn't done better, given the decent yields on offer and the vast pool of potential investors now that Russia has investment grade ratings at two of the three main credit rating agencies.

Russian Debt Yields Bear the Cost

Diplomatic row over poisoning of Sergei Skripal and his daughter widened Russian bond spreads to U.S. Treasuries

Source: Bloomberg

As Gadfly argued Friday, the terms were more generous than they would have been had Russia issued earlier in the year. The political difficulties making headlines at the time of the sale saw to that.

But that wasn't the only sweetener. In an attempt to lure back offshore Russian capital there was an innovative clause to allow future coupon payments and the final maturity in currencies besides dollars. This is at the investor's discretion, so this winds up offering protection were sanctions to squeeze dollar payments in future. However, take up of this option has so far been relatively modest, at $200 million.

The geographical breakdown of the order books may not be as widely spread as it appears. Though half of the investors in the the 2047 tap are listed as being in the U.K., in reality many could be from investors of Russian origin. Nevertheless, it's a decent range of buyers. 

Queuing Up for Russia

U.K. and U.S. buyers bought a significant share of each of Russia's new bonds on March 16

Source: Bloomberg

Overall, it looks like playing it safe and issuing a smaller deal was the wiser option for Russia. It will probably want to issue foreign-currency bonds again later in the year, in line with its 2018 budget plans. Though it doesn't necessarily need the money, doing so will remind investors and the wider world that political turmoil doesn't meaningfully restrict its access to foreign capital.

When it does come, Russia may be keen to pursue other currencies, rather than issuing repeatedly in dollars. In 2013 it raised 750 million euros ($923.7 million) of seven-year debt. With 2.5 years to maturity, yields are close to zero percent. There is not the same deep pool of emerging-market investors in euros compared to dollars, but it would certainly make a statement that whatever politicians say, investors aren't turning away.

Domestic inflation is firmly in check, debt levels are low, and the central bank is in rate-easing mode. The threat of sanctions is the biggest risk for foreign investors in Russia. But unless Putin uses his renewed political mandate to significantly worsen his terms of engagement with the West, the door to raising money looks like it will remain open. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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