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Rouble-Eurobonds to be hampered by sanctions

Despite clear demand for Russian rouble-denominated paper amongst the international investment community, US and EU sanctions would prevent many issuers from tapping international markets. Entities that can access dollar markets will do so despite reduced pools of liquidity, whilst the local markets will remain the preserve of sanctioned entities.

Sept 14, 2016 // 8:13AM

Foreign ownership of Russian government local-currency OFZs reached RUB1.35tn (US$21bn) in June, equivalent to 25% of the total amount according to data from the Russian Central Bank. This has risen from almost RUB200bn in June 2012 according to figures from Bloomberg.

The increase in demand for Russian paper seems to have led to the return of rouble-Eurobonds (rouble-denominated bonds issued outside Russia) after a three year break, with VTB Capital preparing a number of deals for international investors according to a recent Bloomberg report.

The first rouble-denominated Eurobonds were issued before the financial crisis, and were popular because rates were stable and investors were comfortable with the currency risk. However, according to a senior fixed income advisor, substantial issuance of rouble-Eurobonds is unlikely.

“Rather than a currency problem preventing borrowers from issuing internationally in either roubles or dollars, a sanctions problem will likely prevent them from accessing the markets.”

Furthermore, the lack of sanctioned entities in the dollar markets is also limiting liquidity for non-sanctioned entities as the international market dries up.

“The Russian sovereign’s US$1.75bn issuance in May was met with a lukewarm reception. If the Russian government has difficulties issuing internationally, then Russian corporates will as well.”

Because sanctions are not an issue for the domestic market, many sanctioned entities such as Russian banks and oil companies, as well as non-sanctioned entities struggling to access international capital, are turning to local borrowing.

“There is appetite for rouble bonds, but only because there is no other option due to sanctions.”

The advisor noted however that the rouble market is largely domestic but liquidity is becoming increasingly scarce.

Although sanctioned entities are likely to go local, non-sanctioned companies that can access dollar funding are likely to continue to do so, especially because many companies are exporters and trade in dollars.

Alongside the sovereign, Sovcomflot, Evraz, and NLMK, all non-sanctioned entities, recently issued bonds worth US$750mn, US$500mn and US$700mn respectively in June, but the advisor noted that the dollar markets are not as deep and liquid as they used to be. This means there could be problems if the smaller amount of dollar issuances leads to increased activity on the local markets, causing a crowding out effect.

“Because the rouble market is likely to be saturated with companies that have to go there due to sanctions, there will be less investor appetite for the other names that are looking to access the market,” the advisor said, adding that we could see rouble bonds become more expensive for issuers.

“Russia would be doing really well in the current environment if it was not for sanctions. They are not only having an impact on sanctioned companies, but also on non-sanctioned companies, so issuance volume has been lower than in the past, particularly when there were no sanctions.”

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