Monday, 23 may, Russia announced the deployment 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. The organizer is assigned to “VTB Capital”.
Why the Ministry of Finance to borrow in dollars?
In early February, Deputy Finance Minister Sergei Storchak said that Russia intends to return to international bond markets. “Perhaps, after all, going to cook the issue”, — he said. Earlier in January, he said that the external state loans will not be until towards Russia are sanctions. “Restrictions are not lifted — what’s the point? Why labor in vain?” — he said then.
The Ministry of Finance reported that he had sent requests to 25 foreign banks in the placement of sovereign Eurobonds. In particular, the queries received by Barclays, BNP Paribas, Bank of America Merrill Lynch, Bank of China, Wells Fargo, Goldman Sachs, J. P. Morgan and others. Proposals received three Russian Bank “VTB Capital”, Gazprombank, Sberbank CIB. However, none of the foreign banks have not agreed to participate in the offering, citing the recommendations of the U.S. government and the European Union.
Chief economist for Russia and CIS “Renaissance Capital” Oleg Kuzmin said that the placement of Eurobonds to Finance Ministry — a kind of test. “The Ministry of Finance verifies the ability to borrow on international markets. It is an option along with the placement of OFZ,” he says. According to the expert, if they spent the Reserve Fund, to Finance the budget deficit the government will have through the issuance of bonds. “In this case, understanding that you can take in the West, despite sanctions, could be very useful,” — said Kuzmin.
A source at the Finance Ministry confirmed that the placement of Eurobonds is to “feel the market”. “For companies this can be a guide of profitability,” he said.
“The time for placement is very good. Russian securities are traded at its lowest level since March 2014, when it was annexed Crimea and imposed sanctions”, — said the head of trading “Aton” Yaroslav Podsevatkin. In particular, the sovereign Eurobonds maturing in 2013 traded with a yield of 3.94%. In March 2014, the yield on these securities was at the level of 4.5% per annum. According to Podsevatkina, Russia has long held in foreign currency, and banks have accumulated a lot of dollar liquidity. “Therefore, the demand for Eurobonds will be high,” he said.
The last time Russia took on the international markets in September 2013, when he sold the paper for $6 billion, maturing in 2019, 2023 and 2043, respectively.
According to Sberbank CIB analyst Alexey Bulgakov, at the end of 2015, investors sold off the securities of issuers in emerging markets, expecting further deterioration of the economy, but from the beginning, they again began to buy the paper on the background of increasing oil prices. According to estimates Sberbank CIB, about 60-70% of holders of Russian securities with maturity up to five years — banks and private investors from Russia. “The volume of deposits in the banking system is growing and lending is reduced, which leads to an increase of liquidity in the system and a drop in interest rates on deposits. Against this background, foreign currency Eurobonds in comparison with foreign currency deposits are attractive asset for many local investors,” said an analyst in April.
On what conditions will Russia?
A source in the investment company, which plans to participate in the purchase of Eurobonds, said that “VTB the Capital” expects to deploy about $1 billion of Eurobonds. This information was confirmed by a source in another investment company. A source in one of banks does not rule out that “VTB Capital” can try to place the entire amount planned for this year by the Ministry of Finance of Eurobonds of $3 billion, “the Demand for foreign currency bonds of Russian issuers are now elevated,” he notes.
The reference point of yield of Eurobonds of the Ministry of Finance is 4.65 to 4.9%. Russia is going to offer interest rates that reflect market levels, says the analyst of Raiffeisenbank Denis Poryvai. “The yields on similar Russia 2028 issue amount of 4.75%, but the yield of this release significantly higher total yield curve of Eurobonds of Russia by 50 b.p. And if all the focus on the total yield curve, one might even say that Russia offers investors a good premium,” says Poryvai.
Despite the fact that U.S. sanctions and the EU do not apply to the Russian government borrowings, the terms of issue contain three specific provisions related to the Western sanctions. First, the paper will serve the national settlement Depository (NSD) — domestic Central securities Depository, and not the European clearing systems Euroclear and Clearstream. Investors can’t hold securities through Euroclear and Clearstream, until they take the relevant decision, the Ministry of Finance warns in the prospectus. In April Reuters reported that Euroclear and Clearstream refused to serve these Eurobonds due to fears to violate the provisions of the US authorities and the EU regarding compliance with sanctions.
In addition, the conditions of the securities provide for payments to investors not in dollars but in other currencies — pounds sterling, euros or Swiss francs. “The payments on the bonds may affect geopolitical events, and if the payment in dollars will become impossible, provides for payments in alternative currencies,” — said in the section “risk Factors”. Informed sources Reuters reported that Western banks involved in the project, advised the Finance Ministry not to nominate a paper in dollars, because any dollar payments pass through the US financial system and there is a risk of blocking such payments because of the sanctions. The organizers considered the variants with the placement of securities in Swiss francs, Chinese yuan or euros.
Finally, the third position, which never was in Russian sovereign issues — the obligation of Russia not to use the proceeds of the issue in ways that violate US sanctions or the European Union. As written , this clause insisted banks that participated in the negotiations on the organization of production, because he wanted from Russia formal assurances that funds will not be transferred to companies or individuals under sanctions. The Ministry of Finance went in this concession, prescribed in the prospectus of Eurobonds that “the attracted funds will be directed to activities that would be prohibited for citizens and companies in the U.S. or the European Union in the framework of the relevant sanctions laws or policies”.
Will there be a successful placement?
From the point of view of the current external debt, the volume of which, according to Oleg Kuzmin of Renaissance Capital, April 1, 2016 was $31 billion ($12 had on paper in a foreign currency), the placement of Eurobonds for $1 billion doesn’t look significant. “I think that to sell such amount of securities in high demand from investors, will be easy”, — says the analyst UK “the alpha the Capital” Vladimir Bragin. According to him, the increased demand is related to the fact that not long ago housed a high-quality issuers out of Russia. “Over the past couple of years, the market of the Russian Eurobonds shrank by 20%,” he comments.
Placement of Eurobonds of the Ministry of Finance can be successful on the wave of demand for securities of Russian issuers. In March and April, the market experienced multiple placements. In particular, their five-year Eurobonds for $350 million posted the leading operator of container terminals in Russia — Global Ports. Investor demand was several times oversubscribed. In addition, 11 April closed the deal, the investment Bank “Renaissance Capital”, having placed five-year Eurobonds on $200 million of 9.5% per annum. At the end of March the transaction on placing of three-year Eurobonds in volume of $150 million has closed the Bin. According to the Bank, the buyers of the bonds were made by investors from Hong Kong, Singapore, Zurich, Geneva and London. In mid-March of Eurobonds on 500 million Swiss francs posted to “Gazprom”. The organizer — Bank UBS also noted an increased demand for paper, investors have sent an application almost 2 billion Swiss francs.
“If the placement occurred in the absence of sanctions, to sell bonds for $3 billion for the Ministry of Finance would be easy,” says senior analyst PSB of Dmitriy Gritskevich. According to him, in the current situation, the demand can be limited, especially from foreign investors. “Apparently, the organizers are planning to try to place a smaller amount in order to assess the level of demand,” he suggested.
Who can buy the Russian Eurobonds?
“Most likely, the location will be the active participation to take Russian investors, the same banks who need somewhere to invest the foreign currency funds”, — said Podsevatkin. According to him, in favor of this version says that the transaction is carried out through the national settlement Depository. For foreigners, the purchase of Russian securities via NSD — more complicated technical process than the purchase of securities through Clearstream and Euroclear, said the trader. “Given the large volume of monetary liquidity accumulated by the banks, they will easily redeem this issue,” says Poryvai, noting that Americans and Europeans will not violate any informal limitations of their controllers for this release.
Bragin also believes that investors, most likely, will be Russian banks and investment funds. “For foreign investors it is very attractive paper by the ratio of “risk/yield”, the analyst said, however, he also did not rule out that due to the risk of sanctions the participation of foreign players is limited. “But then Russian securities may fall to foreign banks and funds through the secondary market,” says Bragin.
Placement of Eurobonds by the Ministry of Finance can put pressure on the ruble, warns Poryvai: “the Ministry of Finance in fact take dollars from foreign investors, and from the Russian system that will carry them to the Central Bank, which in return will print rubles (through accounts at the Central Bank, as is now happening in the expenditure of the Reserve Fund). In the end of dollars in the system will become less and rubles more”. If the dollar while placing to flow in from external markets, it would, on the contrary, strengthened the ruble, ” he explains. Earlier, the Russian Finance Minister Anton Siluanov said that Russia may withdraw from the placement of Eurobonds, in order to prevent excessive strengthening of the ruble: the Ruble strengthened due to the fact that oil prices are rising, and the additional inflow of capital in the form of Eurobonds placement will only affect the strengthening of the ruble. We need it? We believe that especially do not need,” — said the official.