Russia's first Eurobond issue since Western economic sanctions were imposed in 2014 raised $1.75bn, Finance Minister Anton Siluanov said on May 24.
The government placed the 10-year notes at a yield of 4.75% with the assistance of VTB Capital, the investment-banking arm of the sanctioned state lender VTB Group. According to the Finance Ministry's debt department, the main buyers of the bonds were investors from UK, prompting some speculation that offshore Russian money was also involved.
"Despite unofficial pressure exerted on certain elements of the global financial-market infrastructure, demand from foreign investors of various regions showed a high level of trust in
Russia as an issuer," Siluanov said in a statement.
This was Russia's first Eurobond since it was sanctioned by the EU and US for its actions in Ukraine two years ago. Commentators painted the issue as a bold "sanctions-defying" move by Moscow, but Western investors had appeared wary of new Russian sovereign notes in sanctions conditions.
The ministry responded by keeping the books open an extra day to May 24 in hopes that some heavyweight Western and Asian investors would still participate in the issue, Vedomosti reported.
The delay seemed to boost overseas interest, producing a $7bn order book that included investors in the US, Europe and Asia, reports said. But instead of selling $3bn as expected, Russia settled for $1.75bn.
However, much of the demand for the notes came from domestic investors such as Uralsib, Aton, and other notable investment bank players, the paper said.
"I don't think it really shows very much in terms of Russia's ability to get around sanctions, rather the opposite, it shows still how lock-jammed Russia is, and that it is still really dependent on local financing sources," emerging markets strategist Tim Ash of Nomura International said.
The lack of appeal for Western investors was reportedly in part because the two main settlement houses that usually facilitate such placements, Euroclear and Clearstream, did not agree to handle the paper. Instead, the bonds are held via Russia's own National Securities Depository (NSD), "so they are more akin to external OFZs," Ash added. "So you buy them on the assumption that eventually issues with Euroclear are resolved."
Russia announced its intention to place a benchmark $3bn bond issue earlier in the year, but Wall Street and European banks came under intense pressure from Western authorities and financial regulators not to assist.
Although Russian sovereign debt is not prohibited directly, Eurobond revenues could potentially be channelled to sanctioned companies, making Western banks wary of falling foul of the sanctions regime.
Moscow previously held back from such issuance for fear of provoking further sanctions from the West to close gaps in the embargo regime. However, in mid-May the European Commission's foreign policy chief Federica Mogherini said there would be no talk of tightening sanctions at the next EU council meeting.
The new bond's initial documentation emphasised that the raised funds will not be used "to support legal or private entities currently sanctioned by the US and the EU".
Russia's last sovereign issue was $7bn worth of Eurobonds placed in 2013: $1.5bn of 5-year notes at 3.7%, $3bn of 10-year notes at 5.1%, and $1.5bn of 30-year bonds at 6.05%.
The issue marked a swift turnaround in Moscow's position on new Eurobonds, after Siluanov in mid-April appeared to drop the idea, saying the "timing was not right".
"What countries are borrowing in the [foreign] currency? Those that need to improve the balance of payments, with which we have no problems," Siluanov said then.