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Friday, February 23, 2018

Sanctions failed to prevent the success of the Russian Eurobonds

For the first time after the introduction of Western sanctions, Russia has returned on the external debt market – and very successfully. So-called Eurobonds (debt obligations) of Russia bought it, apparently, including Western banks. This is despite the fact that the government and Washington, and Brussels is strictly recommended that their financial institutions not to do it. Proceeds from the placement of money will help the Federal budget.

One of the major surprises this week was the placement of Treasury dollar bonds, according to unofficial information, the amount of 1 billion dollars. In the law on the budget of the Russian Federation provides for the possibility to borrow on the external market in 2016 to $ 3 billion. Russia for the first time since September 2013 has entered the international borrowing market.

“Russia has confirmed that the full functioning of the economy and the financial system in terms of sanctions it is possible”

When Moscow in February offered to foreign and Russian banks to participate in the Russian Eurobonds 2016, the US government and the European Union after a deal was transferred to the political plane.

The United States demanded that American investors not to participate in this transaction: although the government of the Russian Federation not included in the sanctions list, the loan can be sent to the companies under sanctions. For example, the funds may direct under sanctions Vnesheconombank, which has this year to extinguish Eurobonds. Since then the U.S. position on doing business with Russia has not changed. Such actions are risky, while there are sanctions, commented on the placement of Eurobonds of the Russian Federation, state Department spokesman mark Toner, RIA “Novosti”.

Officials of the European Commission also recommended that the European banks do not participate in the placement of Russian Eurobonds. It was reported that under pain of penalties American and European banks are not going to do it. The Western press have put an end to the sale of Russian securities.

However, Russia not only did not change his plans, but also made the stay more than successful.

Initially, the organizers planned to place $ 1 billion. But already on the first day the demand for ten-year bonds with a yield of 4.65 and 4.9% oversubscribed and, according to Bloomberg, amounted to 5.5 billion dollars. The order book had to close last night, but extended up to 14 hours of Tuesday, Moscow time calculation of the organizer of issue “VTB Capital” on the participation of Asian banks in the purchase.

As a result, the oversubscription of the Eurobond Russia already by Tuesday morning had reached 6.3 billion dollars, which is six times higher than the original volume of placement, according to a source in banking circles. Official comments of the Ministry of Finance of the Russian Federation on the results of the operation yet.

While not known for certain as to who was the buyer of Russian Eurobonds. Skeptics believe that Western banks did not dare to participate in the transaction, so the main beneficiaries were the Russian banks. However, such a high demand on Monday indirectly indicates that part of the Eurobonds still bought by foreign investors, and increased demand on Tuesday to speak about the participation of Asian investors.

Such a large demand for Russian Eurobonds means that investors consider the Russian paper good investment, says Anna Kokoreva of “Alpari”. This is another argument in favor of the fact that customers Eurobonds of the Russian Federation, most likely, were not only Russian, but also foreign investors. “Given loose monetary policies in some developed countries and higher risks in financial markets to find a suitable for large-scale investment tool is not so simple: either low returns or high risks. Russia also offered a product with high yield and minimal risk. Of course, a number of foreign investors had refrained from buying for security purposes, but for some, money does not smell” – said the Director of analytical Department of “Alpari” Alexander Razuvaev.

“On the one hand, borrowed funds for Russia is now more expensive than it could be, and with another – the Russian securities have a market advantage. Rates on similar securities of European countries two to three times lower, and the risks are about the same,” – says Anna Kokoreva.

That Eurobonds of the Russian Federation will raise investor interest in Asian, South American and even European markets, despite sanctions, believed also Vice-President of the Washington “Eurasia center” Earl Rasmussen. Because these investments are very promising and are practically zero risks, he explained. The expert regrets that because of the advice of the United States, U.S. banks are unable to participate in placing of the Russian Federation and thus lost potential profit. “Russia is a huge potential. We know that it is one of the leading countries in the production and sale of energy. I think this is a good opportunity for investment. Russia has low debt levels; it cannot declare a default on the debt (the debt ratio to GDP it is much better than the United States). Thus, the investment is safe” – quoted expert RIA “Novosti”.

Interestingly, the Finance Ministry introduced a number of innovations in the terms of the transaction that reduce the political risks for Western investors. In particular, the calculations for this transaction will be carried out not through traditional systems Euroclear and Clearstream, and via national settlement Depository (NSD). “This, apparently, is necessary in order to circumvent the technical difficulties that arose after the regulators in the EU and the United States “recommended that” local banks not to participate in the offering,” says managing Director of Sberbank Investment Research (SIR) Alexander Kudrin.

As the United States controls the entire planetoid these considerations in the prospectus of the bond issue stipulates that the funds will not be used to violate the sanctions of the EU and the United States. “The funds from the placement will be used to cover the dollar costs, such as interest payments and principal repayments on foreign debt. The remaining resources will be sold to the Central Bank and will become part of its reserves. Finally, the function of fiscal agent probably will also assume NSD”, – said the expert SIR.

Meetings with clients of the Bank previously testified that the demand for bonds among foreigners could be very large, and some customers noted a willingness to purchase bonds on the secondary market, writes in his review chief economist for Russia and CIS investment Bank ING Dmitry Field.

“Even many of the official sanctions of the West are unable to deter European companies from Russian bonds. For our market this is, without doubt, positive news,” says Director of the analysis Department at alpha-Forex Andrei Dirgin.

In any case, demand from the Russian investors will be more than enough to ensure that the borrower has placed the entire budgeted amount of securities with a minimum premium that is due to the presence of excess foreign exchange liquidity in the banking system, said Alexander Kudrin.

In his opinion, during the initial offering, the share of foreign participants is unlikely to exceed 10-15% of the total volume of applications. But on the secondary market the share of foreign investors could increase significantly, according to the expert SIR.

Moreover, sooner or later, he says, those papers will start to circulate in the system of Euroclear and Clearstream, and in this case, the award of the curve is relatively “common” Eurobonds can be reduced to 5-15 b. p. (basis points). Now the award relative to the secondary market amounted to 50-75 b. p. If the settlement of transactions in these instruments will only be conducted via NSD, said Kudrin, the amount of the premium in the secondary market is likely to be 20-30 b. p.

Thus, we can say that Russia successfully returned to the external debt market, despite sanctions and political pressure from the West. Thus, Russia confirmed that proper functioning of the economy and the financial system in terms of sanctions it is possible, says Razuvaev.

And, of course, the placement of Eurobonds is a positive thing for the budget. “The Ministry of Finance diversifitsirovat sources of funding and reduces the potential pressure on the OFZ market, which has yet remained the only source of borrowed capital for the government”, – said Alexander Kudrin from Sberbank Investment Research.

Russia has a comfortable low level of external debt, but lately the money had to raise by borrowing on the domestic market or to take in the Reserve Fund, as well as from the position left by cuts in budget expenditures. The proceeds on the foreign market means Russia will be able to spend as to pay off the deficit and to service external debt and to replenish the gold reserves of the Central Bank of the Russian Federation.

According to the forecast Kokoreva, the Finance Ministry will place as much as he is able in the future to serve. “Perhaps the office will take advantage of a good coincidence and will attract $ 6 billion that it would be right and profitable,” does not exclude it.

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