Russia plans first bond issuance since sanctions

Russia is exploring international bond issuance for the first time since the war in Ukraine sparked sanctions from the west, in a sign that the Kremlin is keen to find additional sources of revenue as the economy heads for a second year of recession.

The country's finance ministry announced on Friday that it has approached 25 western investment banks and big Russian lenders Sberbank, VTB, and Gazprombank about a possible eurobond.

Russia last raised cash on international markets with a $7 billion bond in 2013, though with this year's budget earmarking $3 billion for a possible sale, the amount sold is likely to be lower.

An executive at one of the banks contacted said the ministry was now exploring raising 3 billion euros. A second banker at a European bank said Russia was likely to seek benchmark 10-year debt.

If Russia issues a eurobond this year it will mark the first time it has attempted to regain access to capital markets since the US and EU imposed sectoral sanctions against it in 2014, following Moscow's annexation of Crimea and the backing of separatists in the conflict in eastern Ukraine.

Moscow, with the Kremlin in the background.
Alexander Zemlianichenko | AP
Moscow, with the Kremlin in the background.

Although the sanctions focus on a few large, mostly state-run, companies such Sberbank, VTB and oil company Rosneft, western investors were left wary of Russia in general, with banks Barclays and Royal Bank of Scotland closing shop in Moscow entirely.

Viktor Szabo, senior investment manager at Aberdeen Asset Management, said: "Trading in Russian paper has been quite strong in recent months as investors wonder whether sanctions might be eased. Russia could come to market now with bonds that yield less than they did in 2013."

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Although the premium demanded by investors to hold bonds issued by Russia rather than lower-risk US bonds has widened in the past year, falling yields in the main bond markets mean Russia's borrowing rate has dropped.

On Russia's dollar-denominated 2023 bond, the yield is now 4.53 per cent, down from 4.9 per cent in September 2013.

Russia requires the new revenue to plug a hole in its budget caused by the recent drop in oil prices. Ministers have been ordered to slash 10 per cent of expenses; the government is also considering a privatisation programme for some state-owned companies such as Rosneft, Aeroflot, the airline, and diamond miner Alrosa.

One western banker said: "I don't know how the hell they're going to do it — they'll have to take a little bit from here, a little bit from there." a

Timothy Ash at Nomura said a bond issued could pose a challenge to the west's sanctions regime.

"If the Russian sovereign is able to borrow long term money cheaply, what will stop it filtering monies down to state owned sanctioned and unsanctioned entities alike, easing up pressure on Russia's financing position and corps/banks alike," he said. "A big hole will have been blown in the whole financing aspect of the sanctions regime."