Although there is no specific need to raise capital through another debt issuance, the government could take advantage of attractive market conditions and its own advantageous position. Russian corporates, which have also recently been active in the markets, could also look to follow suit.
The Russian Finance Ministry has noted that it could sell FX from its reserve fund to raise capital towards the end of the year, although possibly as soon as August.
This comes alongside news that Russia may also issue further Eurobonds amounting to US$1.25bn this year, according to Deputy Finance Minister Maxim Oreshkin.
The main driver for a second Russian sovereign bond issuance would be the cheap cost of funding that is present for borrowers in the external markets.
Sergey Dergachev, senior portfolio manager of EM debt at Union Investment Privatfonds GmbH said the Russian sovereign is in a strong position relative to other EM countries.
“The Russian sovereign has low external debt levels, declining corporate external debt levels, resilience towards Western sanctions and a stable political environment, especially when compared to other important EM sovereigns such as Turkey or South Africa.”
If Russia does issue a second Eurobond, it will likely be in a very similar in pricing and format to the last issuance in May, a US$1.75bn 10-year note at 4.75%.
Any new issuance would likely have a large local settlement and Russian lead managers – VTB Capital was the sole arranger on the last transaction – in part due to sanctions from the West.
“Demand will nonetheless likely be large for any new issuance, especially from Asian as well as Russian investors.”
Although Russia has already refinanced its maturing 2017 Eurobond with the most recent issuance, Dergachev said Russia could still try to take advantage of a favourable window.
“The chances of Russia issuing a new Eurobond are around 40-50%.”
The possible return of the sovereign follows a spate of Russian corporate issuances. This month STLC became the latest corporate to tap the markets with a US$500mn 5-year 5.95% bond, following on from June issuances from Sovcomflot, Evraz and NLMK worth US$750mn, US$500mn and US$700mn respectively.
Large non-financial bluechip corporates such as Gazprom, Norilsk and Lukoil do not have a huge need to issue international debt, and have largely cut their capex programmes or initiated debt buybacks. However, despite a lack of necessity to issue, opportunities could arise for Russian corporates tapping the markets.
“Such a move could be an interesting investment opportunity. Although Russian corporates have de-levered over the last two years, they still offer compelling relative valuations against other BBB rated entities,” said Dergachev, adding that Russian corporates also offer a scarcity value.
However, the Russian financial corporate sector does not perform quite as well as the non-financial sector in comparison with other EM banks.
Dergachev noted that banking sector struggled more than non-financial corporates in raising funds due to Western sanctions, meaning that the majority of the sector’s funding is likely to come from the government.
“I do not expect huge levels of issuance from Russian financials, one or two banks such as Alfa could issue a Eurobond, but supply will likely be thin here.”
At the time of writing, Alfa placed US$102mn in Euro Commercial Paper due in July next year.
As many Russian corporates with outstanding debt have strong balance sheets and good cash liquidity levels, it cannot be ruled out that issuers will refinance their debts with their own reserves said Dergachev.