Russia’s €1.5bn eurobond sale brushes aside US sanctions risk

Russia took advantage of easing tensions between Moscow and Washington to raise €1.5bn euros from investors in its first international bond sale of the year on Thursday.

The Russian finance ministry received €2bn in orders for the euro-denominated six and 15-year bonds in a sale that comes just a month after the US placed sanctions on the sale of Russia’s local rouble debt.

Those penalties only briefly knocked the market for Russian assets as investors judged them among the milder steps US president Joe Biden’s administration could have taken as it seeks to punish Russian president Vladimir Putin’s regime for actions including an alleged cyber-hacking campaign and the imprisonment of opposition leader Alexei Navalny.

Markets were further buoyed this week by a cordial meeting between US secretary of state Antony Blinken and his Russian counterpart as the two sides negotiate over a mooted summit of the two countries’ leaders, helping the rouble to its strongest level in two weeks against the dollar. The Biden administration also opted to waive some sanctions on the Nord Stream 2 gas pipeline Russia is building to Germany.

“In the last couple of weeks the rhetoric has been dialled back and there’s talk of Putin and Biden getting together, so this is a prime time for them to issue,” said Uday Patnaik, head of emerging market debt at Legal & General Investment Management. “It’s quite opportunistic.”

Russia sold €1bn of a new bond maturing in 2036 at a yield of 2.65 per cent, and topped up a 2027 bond issued last year for an extra €500m. Three Russian banks — Gazprombank, Sberbank CIB and VTB Capital — arranged the sale.

The deal was the first foreign-currency debt sale since another euro-denominated sale in November. Russia has not sold dollar bonds since US investors were barred from buying them in the primary market in 2019.

The new sanctions also bar US investors from buying new issuances of Russia’s rouble debt. Moscow claims it can replace that demand locally and, in a show of force, sold the bulk of some recent issuances to state-owned banks like VTB.

Despite the existing sanctions on Russian bonds, and the threat of further steps by the US or its allies, investors are drawn to the country’s relatively high yields and low levels of debt. As much as 54 per cent of Russia’s Eurobonds are held by non-residents even as foreign investors’ share of domestic bonds has dropped from 35 per cent last year to 19 per cent last month.

Thursday’s yield compares with a yield of 0.19 per cent on the equivalent maturity German bond, which serves as a reference for debt sold in euros.

Even so, the borrowing costs represent a sizeable extra yield over similar Russian bonds trading in the secondary market, the result of many Western investors’ nervousness about wading into Moscow’s debt markets.

“There is still sanctions risk,” said Patnaik, who decided not to buy at Thursday’s sale despite being attracted by the yield on offer. “It’s not worth the effort.”


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