Weekly Market Outlook

Russia Hails Eurobond Triumph as Traders Ask: Who Bought It?

While Finance Minister Anton Siluanov said the deal showed foreigners have “trust” in Russia, investors expressed concern the bond won’t be admitted to international settlement systems. VTB Capital, the investment-banking arm of penalized lender VTB Group, emerged at the start of the week as the sole organizer of the deal after foreign governments warned lenders away from the placement.

“We had a situation where the State Department, the U.S. administration, decides on behalf of investors and settlement organizations whether they participate in the placement or not,” Siluanov told reporters Wednesday in Moscow. Euroclear Bank SA, on which many foreign funds rely for bond settlements, came under “unprecedented pressure” in connection with the sale, and in the future, Russia will aim to sell debt abroad and at home without the use of foreign banks, he said.

Russia’s first Eurobond sale since 2013 goes a small way to plugging its biggest budget deficit in six years, but marks a symbolic victory for President Vladimir Putin, who has sought to play down the impact of restrictions imposed for Russia’s role in stoking the Ukraine crisis. The government placed the 10-year notes at a yield of 4.75 percent on Tuesday, compared with initial guidance of 4.65 percent to 4.90 percent.

In an interview with Bloomberg Television, VTB Chairman Andrey Kostin said the bank is still in talks with Euroclear, though the securities at this stage can only be settled through Russia’s own depository system. That put off foreign investors including Aberdeen Asset Management Plc and Allianz Global Investors Europe GmbH in London and Union Investment Privatfonds GmbH in Frankfurt who worried they would struggle to trade the debt.

“Less than $2 billion is not a lot on a grand scheme of things,” Steve Hooker, managing director and portfolio manager at Newfleet Asset Management LLC said on Tuesday. “The idea was that Russia wanted to say that it is making business as usual, but there are a lot of investors who are still skeptical.”

This year’s budget authorizes a sale of as much as $3 billion. Russia may consider tapping Eurobonds later this year if it sees follow-up demand in the secondary market for the new issue, according to VTB’s Kostin.

“It was agreed with the Ministry of Finance that because they don’t need the money immediately, we might use the opportunity to make another placement to get more during the year,” he said.

The main buyers were from Great Britain, the head of the Finance Ministry’s debt department said. More than 70 percent was placed with foreign investors after the domestic participation was capped at no more than 30 percent, Kostin said.

Kieran Curtis, a London-based money manager at Standard Life Investments Ltd., suggested some of the foreign interest may have come from Russian investors based overseas.

“There’s a lot of Russian money outside of Russia, so if you wanted to say that we sold this overseas, you could probably use that,” Curtis, who helps oversee about $10 billion in emerging-market assets, said at a media briefing. “The main issue for foreign investors was liquidity because it’s absolutely unclear how many market makers are going to be available for participation in the secondary market.”