Ben Aris in Moscow -

While many western borrowers are finding it harder to tap the international credit markets, Russia's banks and companies have already issued more bonds this year then ever before.

"The equity market is trading sideways, but the bond market is on fire," says David Longmuir, a trader with Troika Dialog in Moscow.

While sales of foreign-currency bonds by Russian borrowers have dropped 27% from 2008, issuance in rubles has jumped 36% to a record RUB524bn ($17.1bn), twice the amount of local debt sales in Brazil or Mexico, according to data compiled by Bloomberg, which has been tracking Russian bond issues since the last crisis in 1998.

As part of the Russian government's strategy to make it less vulnerable to the vagaries of the global economy, the Central Bank of Russia is encouraging borrowers to source more money from the domestic market and has cut interest rates over a dozen times since the current crisis began. The state has also reduced the amount it plans to borrow abroad from over $17bn a year over the next three years to about $7bn per year.

Russia's strong fundamentals and accelerating economic growth have made yield-hungry investors hot for Russian debt. While the Russian economy contracted by 7% in 2009, it is expected to put in growth of over 4% this year, which could rise to 5-6% next year (depending on what oil prices do). And the state has gone back to accumulating reserves, which have risen by more than $130bn over the last year from a crisis low of $340bn to $476bn as of September 1, maintaining Russia's position as third-richest country in the world in terms of cash in the bank.

"The Russian economy is recovering after being hit hard by the global financial crisis," says Ed Parker, head of the European emerging markets section of Fitch Rating's sovereign credit team. "Fitch believes that the decline in inflation, shift to a more flexible exchange rate policy, sizable repayments of private sector external debt, stabilization of the banking sector, and rising foreign exchange reserves should serve to reduce the country's financial vulnerabilities."

Russian corporates have found it easier to borrow after the Russian state issued a landmark $5.5bn Eurobond in April, its first issue in a decade, with a record low 5.08% yield, which has set the benchmark for everyone else. "The spreads [on the sovereign issue] were very low indeed - lower than many Western European countries can command at the moment (let alone the likes of Greece)," said VTB Capital in a note at the time.

Money flows

There has been a lot of talk about capital shifting from the traditional western markets and into the fast growing markets of the east, and Russia's bond market is in the vanguard of this trend as fund managers pour money into Russian bond funds.

The fund tracker EPFR reports that unlike with most of developed market equity and bond funds, which attracted less money during the first half of 2010 than they did during the second half of 2009, emerging market equity and bond funds took in more money during the first half of 2010 than they did during the latter half of 2009.

By mid-August, EPFR said emerging market bond funds had extended their year-to-date record inflows to $32.8bn, which trounced the previous full-year record inflow of $9.7bn set in 2005. "Emerging market products account for 29% of all flows into bond funds from European investors in 2010, with a further 27% moving into global products," another fund tracking company, Lipper, said in a report. "Assets have grown at a compound annual growth rate of 30% since the end of 2001. The growth rate since the low-point at the end of 2008 is nearly 70%."

Leading commercial bank Alfa Bank was a pioneer Russian issuer, tapping the international Eurobond market in the middle of the last decade to raise cheaper, long-term funds that it used to finance its retail lending business. Once again the bank has led its peers back into the international debt markets with two big bonds over the last year. The bank offered a $600m, five-year Eurobond in March that was well received and a second $1bn, seven-year Eurobond in September that was three times oversubscribed. Key was the first bond came with a yield of 8.00% and the second one was priced at 7.875%: both bonds were cheaper than the 9.00% the bank had to pay with its last pre-crisis $500m bond issued in June 2008, which at the time set a new record low yield for the bank.

Still, the debt markets - both international and domestic - are only mainly open for blue-chip and large state-owned Russian firms. "The capital markets are open for the blue chips and first-tier companies, but remains closed for everything else," says Ed Kaufman, Alfa Bank's CEO. "It will be a long time before we go back to the no-name Russian regional banks raising $100m-$150m that we saw before the crisis in the last boom."