Russia’s $4bn eurobond swap this autumn could be postponed

A $4bn Russian Eurobond swap, slated to happen this autumn, may fall foul of geopolitics, says Konstantin Vyshkovsky, the head of debt at Russia’s finance ministry.

کد خبر: ۷۱۳۸۳۶

تاریخ: ۲۸ تير ۱۳۹۶ - ۱۰:۵۴

Russia easily got a dual tranche $3bn eurobond issue away in June with demand from international investors – mostly American, according to bankers – topping $6.6bn for the paper. Russia sold $2bn of 30-year debt at a 5.25% yield and $1bn of 10-year bonds at 4.25%. It last issued 30-year notes in September 2013.

The Ministry of Finance said that it wants to return to the market this autumn to refinance another $4bn worth of debt that is coming due by swapping the existing debt for new paper.

However, while issuing new debt is relatively straightforward, Vyshkovsky said in an interview that the swap is more exposed to geopolitics. The US Senate has threatened to put more sanctions on Russia that may affect the attractiveness of the bonds.

"For the swap, the factor of geopolitics probably has greater significance than for a regular placement,” Vyshkovsky said in remarks reported by Bloomberg. "If the overall background will be negative, we can abandon plans to conduct a swap this year altogether.”

The Russian government is not subject to the current international sanctions regime, but the Senate bill seeks to broaden the sanctions and the possibility that this may be extended in ways that expose the holders of these bonds to fines and punishments is enough to cast doubt on the $4bn bond swap deal.

If the deal doesn't happen then it would not be a disaster for the Russian government, as it is planning to do most of its fundraising at home this year. The current budget plan allows for $3bn of new eurobond issues, with the bulk of the borrowing to cover an estimated 2% of GDP federal budget deficit. The Russian federal budget deficit was RUB489.1bn ($8.27bn) or 1.2% for the first half of 2017, according to preliminary estimates by the finance ministry.

The budget allows for RUB1.2 trillion of domestic bond issues (OFZ) each year for the next three years, or $20.2bn a year in dollar equivalent at current exchange rates.

June’s eurobond issue looks very different to the first eurobond issue of last year, a $1.75bn issue that was widely avoided by international investors thanks to pressure put on bankers by the US State Department. However, the follow up $1.25bn bond issued in September was snapped up after the US government failed to follow up and put more pressure.

The US policy towards Russian sovereign issues has not been consistent and left to their own devices yield-hungry investors will happily buy Russian bonds, which are backed with more than $400bn in gross international reserves (GIR) and solid macroeconomic fundamentals.

But as the autumn approaches uncertainty is back and investors are in "risk off” mode, while they wait to see which way Donald Trump's administration decides on the new bond offer. The bill with the new sanctions is currently stalled but may be voted on in the coming months.