Ruble Bonds Outpace Dollar Notes

Russian companies shut out of the international debt markets are selling more ruble bonds than dollar notes for the first time since 2006 as the domestic currency recovers from its 35 percent devaluation.

Russian Railways and X5 Retail Group led the total 261.6 billion rubles ($8.4 billion) of bond sales this year, according to Bloomberg data. That’s more than double the combined value of the only two dollar issues by state-owned Gazprom and Rosselkhozbank.

“Domestic debt looks attractive for investors, assuming the ruble remains stable,” said Luis Costa, an emerging-markets debt analyst at Commerzbank in London. “In the dollar bond market we’re now back to a blue-chip game, while ruble issuance is accessible to a much wider group of companies.”

With international banks and insurers struggling under $1.5 trillion of losses, dollar bonds are all but off-limits for companies in Russia, whose economy shrank an annual 9.8 percent in the first quarter. The ruble rallied 17 percent against the dollar since the government devalued the currency between August 2008 and January, making domestic bonds a safer purchase for Russian banks.

The ruble rose to 30.47 per dollar June 3, the highest this year, from as low as 36.56 on Feb. 18. The rebound has “added some degree of allure” to the domestic bond market, Costa said.

Investors have pared expectations of a weaker ruble since February, according to an indicator that forecasts the currency’s value versus the dollar. So-called nondeliverable forwards on the ruble signal that the Russian currency will be worth 31.87 per dollar in three months from as weak as a prediction of 39.08 on Feb. 2 for early May.

Demand for ruble bonds is also helped because Russian lenders are able to pledge the notes as collateral for loans from the Central Bank, helping create demand for the securities even as the nation remains more badly affected by the global credit crisis than most of its European neighbors.

Without the Central Bank’s refinancing, even “selling bonds locally would’ve been difficult,” said Mikhail Galkin, a fixed-income analyst at MDM-Bank.

Prices of ruble-denominated bonds have risen as the currency stabilized. The notes climbed 7.2 percent this year after tumbling 19 percent in 2008, according to the MICEX Corporate Bond Index. The index advanced to 87.20 on June 25, the highest level since Oct. 20.

Russian companies have about 1.6 trillion rubles of domestic-currency bonds outstanding, according to data compiled by Bloomberg.

Even as investors are willing to buy ruble bonds, rising demand for funds is driving up interest costs, said Maxim Tishin, a money manager at UFG Asset Management in Moscow. “Ample supply” is causing even state-owned borrowers to pay more, said Tishin, who added that he is “expecting even more supply from blue-chip companies.”