Russia goes it alone with first Eurobond since sanctions imposed

[MOSCOW] Russia is venturing into the international bond market on its own after being shunned by the US and European lenders it approached to underwrite its first Eurobond since sanctions were imposed two years ago.

State-run VTB Group's investment banking unit is acting as the sole organiser for the benchmark-sized sale of 10-year dollar-denominated notes, which are being marketed with initial price guidance of 4.65 to 4.9 per cent, according to a person familiar with the matter. The offering comes after a rally in Russian assets pushed yields on outstanding debt to levels that preceded the penalties introduced in July 2014.

Russia's attempt to find underwriters for the Eurobond in February failed after interference from the US and European Union led banks including Goldman Sachs Group Inc. and Deutsche Bank to drop out of the bidding process. Any proceeds from the sale on Monday would not be directed to any activity that violates sanctions, according to the person, who wasn't authorised to speak publicly about the deal and asked not to be identified.

"My understanding is that there are already orders in the book from international investors," Sergei Strigo, who helps oversee US$3.5 billion in emerging-market assets as a money manager at Amundi Asset Management in London.

"It will be a case-by-case basis whether investors will be able to participate on the primary market. Everyone has their own compliance department and it's up to them to give them the go ahead."

The yield premium investors demand to hold Russian 2023 dollar bonds over Treasuries is 256 basis points, compared with about 190 basis points at the time of the 2013 sale. That offering included four parts, with a US$3 billion of 10-year securities yielding 5.112 per cent. The rate on those bonds climbed nine basis points to 4.07 per cent by 1.38pm in Moscow.

Russia needs cash to finance its widest budget shortfall since 2010 after the price of oil, its biggest export earner, fell 56 per cent in the past two years. The country's economy is in its second year of recession and remains isolated by sanctions that have barred its biggest companies from foreign capital markets.

The bond sale today comes just one week after VTB Capital held an annual investment forum in London for the first time since Moscow's role in the Ukraine crisis in 2014 put many state companies on blacklists. Any proceeds from the Eurobond not retained in the Federal Treasury Account would be sold to the Bank of Russia, where they would become part of the central bank's foreign-exchange reserves, according to the person.

In response to Russia's request for proposals from more than 20 international banks earlier this year, the US government told banks that participating in the sale would run counter to foreign policy, while the EU warned banks to be "mindful" of the indirect risks of violating the bloc's sanctions imposed over Russia's role in the Ukraine crisis.

"The Finance Ministry has done its homework and has a good sense of the external bond investors interest and must have made some agreement with some of the bigger emerging-market debt funds to place these securities," said Dmitri Petrov, a strategist on Nomura International Plc's developing-market trading desk in London.

"There is likely to be also a substantial domestic interest for these securities given the excess US dollar liquidity that some bigger bank have."

BLOOMBERG