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Wednesday, October 26, 2016

Experts explained Russia’s decision to return to international debt market

News agencies reported sensational news: Russian Ministry of Finance decided to place Eurobonds, despite the recommendations of European authorities to local banks not to buy these securities. Analysts believe that the risk is justified – the Russian banks have sufficient funds to redeem the entire issue. What is behind Russia’s decision to return to the international debt market?

photo: Gennady Cherkasov

The last time Russia issued Eurobonds in 2013, before the start of the sharp economic downturn and the introduction of the sanctions regime. In 2014-2015, no such attempt was made – the authorities reasonably believed that the crisis and the devaluation of the ruble investors if you buy such papers, at bargain prices that made the whole operation obviously unfavorable to budget.

In 2016 the situation is somewhat stabilized, market conditions became more favorable. And the Ministry of Finance decided to make use of. In the Russian budget for this year was laid on the possibility of attracting foreign currency loans amounting to $ 3 billion by issuing Eurobonds.

In February, the Finance Ministry has sent 25 proposals of foreign banks to participate in the organization of a possible placement of Eurobonds in 2016. However, after it became known that the American and European authorities have given local banks the recommendation to refrain from this transaction. The reason was that the proceeds from the sale of Eurobonds, the funds may be used to Finance companies under Western sanctions.

After that there were reports that the Finance Ministry is considering the possibility to refuse the issuance of Eurobonds, instead, to borrow money on the domestic ruble market.

However, the deal still held. On 23 may, Russia announced a placement on the international Eurobond market. “Production is carried out according to the program of external borrowings in accordance with the law on the budget for the current year”, — says the official report of the Ministry of Finance. In this case without the participation of the foreign bankers: the issue was assigned to one of the largest domestic investment banks.

Market participants say that the decision of the Ministry of Finance is quite logical. “A formal ban on participation in the placement of foreign investors no, but still there is a risk that they will not buy the Russian papers, – says Deputy General Director IK “Finam” Yaroslav Kabakov. – Therefore, we can assume that, in deciding the issue of Eurobonds, the Finance Ministry focused on the demand from domestic banks. And it needs to be great: the banks are practically not increasing their loan portfolios, they have a lot of free money, the demand for ruble-denominated government securities at their placement greatly exceeds the supply. I think that Russian banks may buy and the whole offered volume of Eurobonds: they, in addition to the ruble, and the desired currency investments – to reduce the risk of currency fluctuations”.

Thus, apparently, the Ministry of Finance adopted the decision to issue Eurobonds, realizing that even demand from domestic banks will be sufficient to ensure that the placement of these securities was successful. According to news agencies, the deal on placement of Russian Eurobonds could be closed already last night, however, at the time of signing the numbers to print its results (what was the sum of securities sold and at what prices) were not yet known. However, the fact of Russia’s return to international capital markets – in any event, a landmark event; it is not excluded that an image component also played a role in the adoption by the Russian authorities of this decision.


Dmitry Aderman, Director General of the analytical community ThetaTrading:

“This placement was initially dictated not so much by the need for borrowing, how much the task is to indicate the presence of Russia on the international capital market. The fact is that when the country a long time does not issue Eurobonds (a Russia they never put neither in the past nor in the year before), the financial markets lose benchmark yields for debt instruments of the commercial sector of this country. Because of this national business is becoming difficult to raise funds on the international market – foreign investors or are hesitant to buy Eurobonds of issuers from that state, or require higher returns. What we have seen in the last two years the Russian business did not dare to take on the world market. Now the market will have a reference point in the yield of Russian Eurobonds, which will be the starting point for calculating the yield of Eurobonds of the Russian commercial structures. It is hoped that after that the Russian business will be braver to take abroad. There is no doubt that today’s placement will be successful: the amount is small, and the rate is very attractive, so that those who invest in these papers will be found”.

Pavel Sigal, the first Vice-President of ” OPORA Rossii

“At the moment the government has no urgent need for external borrowing, as there is a large margin of safety in the form of accumulated reserves, but access to the capital market is very important for political reasons. Russian authorities, on the one hand, trying to demonstrate to its Western partners willingness to cooperate and, on the other hand, to evaluate the possibility of raising capital in the context of the sanctions. Problems with the implementation of the new issue of Eurobonds will not, because Russia has a high credit rating, and these bonds relatively high yields”.

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