The Russian government is hoping to tap the international capital markets again this year and could raise another $1.25bn from a Eurobond issue, Economic Development Minister Alexei Ulyukayev told journalists during a trip to Vientiane, Laos. He also said the Russian government could tap the foreign markets next year as well.
Instead of issuing new Eurobonds, the plan is likely to extend the recent $1.75bn bond issued by the government in May now that it has been accepted for clearing by Euroclear after the settlement bank initially refused to include it in its system.
"It is possible to increase the volume of borrowings next year," Ulyukayev said on Friday. "This is completely possible. Investors are interested in investing in Russian assets."
And he is not wrong about that. Foreign investment into the Russian Finance Ministry treasury bills, the OFZ, has surged this year as Russia offers international investors an attractive combination of strong macro fundamentals and relatively high yields that are increasingly hard to find. The US and European Central Bank (ECB) have both cut rates to close to zero and the Bank of England cut rates to 0.25% on August 4, its lowest level since the bank was founded in 1694.
"Despite the summer lull, trading activity in OFZs was relatively high last week with the average daily turnover printing RUB20.4bn vs. RUB13.3bn in the previous week," Maxim Korovin, a fixed income analyst at VTB Capital, said in a note. "Increased flows were mostly related to international investors, many of which used the weakened [ruble/dollar exchange rate] as an entry point opportunity. Thus, the Russian market continued to benefit from a solid foreign bid."
The law on the budget gives the Finance Ministry the right after May's placement of bonds for $1.75 billion that mature in 2026 to borrow another $1.25 billion on foreign markets this year, and Ulyukayev said that in 2016: "It is possible to take $1.25bn."
The money will be used to plug a hole in the federal budget that is now expected to end this year at 3.7% of GDP, higher than the 3% redline that Russian president Vladimir Putin set at the start of this year.
The current budget estimates (a formal plan will be submitted to the Duma in September) was to use RUB2.2 trillion from the Reserve Fund in 2016 to cover part of the RUB15.78 trillion of total planned spending and then borrow $3bn externally and another RUB300bn domestically. All this adds up only if the government hits its RUB1 trillion revenue target from privatizations this year. However, that target is only realistic if part of the state’s stake in Rosneft is sold and the company has been resisting a sale that would water down CEO Igor Sechin’s iron grip on the firm.
Foreign investors should be attracted to buy more of the 2026s “Russian” Eurobond, which was largely bought by Russian domestic banks when it was issued.
“Given the nod now from Euroclear I think it likely that the 2026s will be tapped to take the issue towards the $3bn. I doubt that the [Finance Ministry] would rise the potential ire of the US Treasury by pushing the boat out too much in terms of new sovereign external issuance – the risk then would be of a further tightening in sanctions by the US/EU,” Tim Ash, head of CEEMEA strategy at Nomura said in an emailed note.