Russia begins charm offensive as it lines up $3bn Eurobond

By bne IntelliNews October 22, 2015

Jason Corcoran in Moscow -


Russia is lining up a $3bn monster Eurobond deal for early next year by telling investors the economy is emerging from its biggest shock since the USSR was whip-sawed by the 1985 collapse in oil prices.  

Russian Deputy Finance Minister Oreshkin told foreign investors on a conference call on October 21 that the current crisis is worse than the 1985-1986 crisis because the USSR wasn’t sanctioned and was able to borrow freely on foreign debt markets.

"At that time, the Soviet Union was able to borrow heavily on the global market and by the beginning of 1990s had accumulated a huge pile of external debt," Oreshkin said on the Sberbank CIB call with large US investors, including TCW and T. Rowe Price and the UK’s Ashmore Investment Management. "This time, together with low proceeds from oil and gas exports, we also have to pay down external debt due to geopolitical sanctions that were imposed."

A decision to go to the market hasn’t officially been taken yet, but investment bankers are being sounded out now, especially following the recent completion of the first corporate deals in 11 months by blue-chip issuers Gazprom and Norilsk Nickel.  

Russian sovereign dollar debt has provided double-digit returns this year with the country's corporates posting the best returns globally.

Oreshkin broke down for investors how the economy is set to rebound next year from the combination of sanctions, low commodity prices, surging inflation and the shock rate hike in December.

Russia foreign debt has dropped 30% this year to about $500bn from $700bn despite economic sanctions and the country’s first recession since 2009. The current account and fiscal balances improved this year even as oil prices declined two-fold. 

"Of course, most of it came from a strong figure on the current account side which we expect this year to be about 5.5%," Oreshkin said. "This is enough to cover all the financing needs of the Russian economy this year."

Being cut off from the international debt market has forced corporates to deleverage massively, which has in turn helped to depress capital flight. Corporates who survive the current downturn will be relatively unindebted and in a better place to benefit from a return to growth as weaker competitors fall by the wayside in a myriad of sectors. 

As a result of the debt pile shrinking, Oreshkin told investors that the repayments will be on the "diminishing trend", or about 2.5 times lower next year.

Overall, Oreshkin said there is "no demand" for foreign currency in the domestic banking system even as forex repo lines expire this year. "There is actually excess foreign currency liquidity and some of the banks will be able to pay down this facility at the end of year."

The target is to keep the combined resources of the National Wealth Fund and the Reserve Fund at the level of about 2-3 trillion rubles by 2018.

"We want to gradually unwind the reserve funds as the source of the financing of the deficit," he said. "It will be achieved through two main trends through the lower deficit on one side and large borrowings on the domestic market."

Oreshkin said the Ministry of Finance expects inflation to be about 12% this year and to return to single-digits in January before easing to 6% in 2015 because of "the sharp de-acceleration" in wage growth.

Corporate profits are now growing at "double-digit rates" because of nominal wages growing at a much lower rate. This is translating into a bottoming out of the negative GDP trend. "We plan to have positive quarter-on quarter positive growth in Q4 and next year we expect to see 0.5% growth," he said.

The finance ministry's main assumption for its budget next year is that the oil price will be $50 a barrel and the exchange rate will be RUB63.3 per dollar.  

If Russia doesn’t opt to tap international markets, the government will be content to borrow on the domestic market by expanding programme through fixed-rate notes, floating rate notes and inflation-linked bonds, according to Oreshkin.

Earlier on the same day, Oreshkin told delegates at the RussiaTalk forum that the government is seeing the return of foreign capital "after the shocking events of the last 18 months".

"We see the resumption of syndicated lending of Russian borrowers, capital inflow to subsidiaries of foreign companies for new investments as well as investments of British investors in Russian debt securities," Oreshkin told the conference on October 21.

Even so, "Russia’s economy isn’t at a level where it can feel comfortable and growth needs to shift from non-tradable sectors such as finance, construction and services into tradables."


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