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Is Russia’s frosty relationship with international markets a boon for its debt?

With Russia’s Alfa bank looking to access the debt capital markets in the near future, and given a recent lack of Russian activity on the international markets, there is a possibility that Russian debt could prove to be as popular as Argentina’s recent bond debut – according to Russia’s Deputy Finance Minister. But is that really the case?

May 5, 2016 // 5:30PM

The Russian Deputy Finance Minister said Russian activity on the international capital markets would prove to be more popular amongst the investment community than Argentina’s recent debt issuance. The statement came alongside news that Alfa Bank is looking at tapping the international capital markets.

The bank has already sent a request for proposals for a new bond issuance to a number of banks, and has requested feedback on options including senior bonds, Tier 1 and Tier 2 debt.

A debt offering from Russia may garner large demand given the recent dearth of issuance from Russian entities.

“There would be high interest amongst international investors in a bond originating from Russia,” said Alexander Sychev, a Fixed Income Research Analyst at Rosbank.

He added that the recent debt issuance from Argentina demonstrated that there is high demand for emerging market risk. Russia’s stronger fiscal position in relation to Argentina also adds to the likelihood that any bonds emerging from the country would be well received.

Argentina has a credit rating of SD and RD from Standard & Poor’s and Fitch respectively (selective default), and B3 with a stable outlook from Moody’s. The country has never held an investment grade rating.

This lags behind Russia’s credit rating, which despite two recent downgrades to junk from S&P and Moody’s, still stands at BB+ from the former and Ba1 from the latter. Fitch awards Russia a grade of BBB-. All three agencies have a negative outlook to support their ratings.

Rosbank is rated BB by S&P and BB+ by Fitch. It carries a rating of Ba2 from Moody’s, so if it were to issue, there could be demand.

Compared to the popular Argentine debt, Russian fixed income also looks more attractive when considering spreads. The spread on Argentina’s 2046 debt against the equivalent US debt was 585bp, significantly higher than the 329bp spread between Russia’s 2043 Eurobond and similar US notes.

However, investor concern over whether their funds would actually go to the issuing company, or whether they would be siphoned off into sanctioned companies, could still affect demand, especially after US and EU warnings.

“Western sanctions are still a problem, as they make it difficult for the sovereign and Russian corporates to access western markets,” Sychev noted.

Should either sovereign or corporate entities in Russia tap the international markets, the sovereign would likely to prove to be the more popular investment option, Sychev added. However, this does not belittle the fact that even corporates would be a highly sought after investment opportunity.

“Looking at recent corporate placements, demand for issuances from both Gazprom and Norilsk Nickel were good,” Sychev stated.

Although there were slight premiums in the secondary markets for Norilsk’s debt, there was none with Gazprom. As a result, the situation for Alfa is looking relatively positive, and despite concerns, it would likely find more than enough demand for its debt.

Ironically however, as Sychev noted, Russian entities do not actually need to tap the debt markets, especially for refinancing purposes. Despite economic woes in Russia the majority of them have strong liquidity positions.

Russia & CIS Macro Ratings Policy & Government

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