Russia hasn’t given up on placing another Eurobond this year, despite the toughest U.S. sanctions to date, after already braving a diplomatic spat with the West last month.
“We’ll look for a window of opportunity,” Konstantin Vyshkovsky, the head of the Finance Ministry’s debt department, said in an interview. “The situation is now less favorable for tapping the market, but we never planned a placement three days after such a splash of volatility.”
Borrowing abroad has turned into a test of wills for Russia ever since the first sanctions imposed for its role in stoking the conflict in Ukraine four years ago. The curbs haven’t been enough to deter investors, with bids reaching almost double the $4 billion of Eurobonds sold in March after a round of penalties, following the poisoning of an ex-spy on British soil.
The newest U.S. restrictions, which target prominent Russian billionaires and their companies, are shaping up as a tougher challenge. A bout of panic selling, compounded by tensions over Syria, already forced the Finance Ministry to interrupt its purchases of foreign currency and cancel a regular bond auction for the first time since 2015. It plans to resume borrowing at home this week, according to Vyshkovsky.
“If the external market is closed off for us, the domestic market will replace it,” he said. “The foreign market isn’t a substantial source for financing the budget deficit for us at any rate.”
Following its sale in March, Russia could issue up to $3 billion more in foreign-currency bonds this year, of which $800 million can be used for a debt exchange. The U.S. Treasury Department has so far recommended not pursuing the so-called nuclear option of targeting Russia’s sovereign securities, because that would be too damaging to American investors.
Foreigners owned a record 34 percent of Russia’s outstanding government ruble securities, known as OFZs, before a rout sent the bonds to their worst week in more than a year. Investors offloaded long positions on concern that the U.S. sanctions leave all assets vulnerable.
Russia didn’t experience a “mass sell-off” of OFZs, and the Finance Ministry doesn’t expect any “cardinal” changes to the share held by non-residents, who preferred to buy foreign currency to hedge against possible losses if the U.S. extends sanctions to sovereign debt, Vyshkovsky said. While penalizing Russia’s debt is “the worst scenario,” the popularity of its bonds among foreign investors might be the best insurance against any future curbs, he said.
It may fall to domestic buyers to stabilize demand for OFZs, especially as many big international investors have for now “refrained from any desperate exodus” from Russian bonds, according to Societe Generale.
“Over the coming months, we would naturally expect international accounts to look for opportunities to gradually normalize positioning in the Russian sovereign debt, which has been overweight since at least 2016 across most firms,” Yury Tulinov and Phoenix Kalen, analysts at Societe Generale, said in a research note. “Hopefully, local support should be there to absorb this flow.”
In Vyshkovsky’s view, the recent developments don’t amount to anything “catastrophic and in principle don’t change the overall borrowing conditions.” Still, yields may rise by several dozen basis points if foreign investors abandon the Russian market, he said. Traditional talks with U.S. investors are possible during a planned trip for the spring meetings of the International Monetary Fund in Washington.
“Obviously the political situation is hard to predict,” Vyshkovsky said. “We plan to continue to be actively engaged with non-residents.”
Russia remains interested in borrowing in euros, and it doesn’t consider the dollar market closed. But given the many “fears, speculations” about sanctions against sovereign debt, it’s still vigilant.
“We continue work as planned on becoming capable of borrowing in alternative currencies and in alternative markets,” Vyshkovsky said. “We are in no rush to change anything.”