Russia is in the process of launching its first sovereign bond on the international debt capital markets since the country was subjected to western sanctions as a result of the government’s actions in Eastern Ukraine.
VTB Capital, the investment arm of VTB, the state owned bank, is the sole bookrunner on the issuance. The transaction will consist of a 10-year dollar-denominated bond with a yield between 4.65% and 4.9%. Although no size has been confirmed for the bond it could issue up to US$3bn, the maximum size of the government’s foreign borrowing plan.
According to the bond’s prospectus, the proceeds of the bond would be used to service Russia’s sovereign debt and bolster the Central Bank’s foreign currency reserves.
“Russia does not need the money. They are issuing on the global markets in spite of recommendations from regulators in the US and Europe that they should not do so,” said Jan Dehn, Head of Research at Ashmore Investment Management.
He noted that while the sanctions do not prevent the Russian sovereign from issuing, the authorities in the West are advising banks against helping Russia. “Russia is saying, ‘Fine! I can issue anyway. So there!’ This is very much a statement.”
The prospectus also added that funds would not be diverted into sanctioned entities, although it stated that no assurances could be given on whether the interest in the bonds could be held through any clearance system other than Russia’s National Settlement Depository (NSD), rather than institutions like Euroclear and Clearstream.
“I have not yet heard from Euroclear whether they will provide a ‘bridge’ to the local Moscow clearing house. If not, investors will have to set up their own custody accounts in Moscow for each of their funds, which will be difficult to achieve in a short time,” said Dehn.
However, the issue should not affect the physical trading of bonds, because most custodians will have accounts at NSD (or have a sub-custodian with accounts at NSD), said Bruce Johnston, Head of International Finance at Morgan, Lewis & Bockius.
He added that it did, however, demonstrate the unwillingness of Europeans to get involved in the bond issuance.
Dehn stated that despite the fact that some banks were unwilling to trade the bonds, others saw no obstructions to doing so. “The bond will pay more than the current yield curve offers. Purely on sovereign risk considerations, this bond should be bought were it not for the relatively minor technical problems.”
One of these technical problems is the fact that the VTB group is under sanctions, however it is unlikely to cause significant complications in the sale of the bond.
“The involvement of VTB Capital should have no impact. The sectoral sanctions that apply to the VTB group do not prohibit it selling Russian government bonds,” Johnston said.
Despite concerns, demand for the bond has already reached US$5.5bn. Russia has left very little time for investors to overcome the hurdles present, which suggests that they are sure of a significant amount of demand, mainly from Russians, Dehn said.
