Russian Eurobond Volumes, Prices Surge

Russian Eurobonds continued to surge Thursday, hitting record highs on the back of an anticipated recovery in oil prices and a likely sovereign rating upgrade.

Russia's most-traded $18 billion 2030 Eurobond rose roughly 1 percent Thursday to 51 percent of nominal value -- up 4 percent on the week -- while the bond's yield fell to a record 14.20 percent.

Analysts said global markets had been worried about plummeting oil prices undercutting the Russian economy, but recent news that OPEC is likely to cut output gave cause for optimism.

Additionally, international ratings agency Moody's last week raised its rating of Sibneft, Russia's No. 6 oil producer, to B1, piercing Russia's sovereign ceiling of B2. The upgrade sent a strong signal to the market that an upgrade of the sovereign rating, which has a positive outlook, is coming soon, analysts said.

At the same time, Russia announced this week that by the end of the month it would redeem its first ever Eurobond, a $1 billion note issued in 1996. The move will free up money that is likely to be invested in other Russian bond issues.

"Many people holding large positions in this issue are tempted to reinvest in other issues; already, you can see buying across the yield curve," said Andrei Sakharov, head of capital markets at Menatep St. Petersburg bank.

"During the recent global downturn, including the Argentine crisis, cross-boarder investors pulled out significant amounts of cash, which they are now sitting on. It is the end of the year, a time to make investment decisions for next year, and Russia looks like a good choice," Sakharov said.

Russian Eurobonds have been the second-best performing of all emerging markets this year, rising 41 percent, on volumes second only to Mexico.

The Wall Street-based emerging markets traders association EMTA said Thursday that total trading in emerging markets debt reached $885 billion in the third quarter, the second-highest level in three years, with Russian paper accounting for $82 billion, or nearly 10 percent of the total -- up from 38 percent year on year.

Trading in the 2030 bond, the largest emerging market issue of $18 billion, accounted for a turnover of $45 billion, second only to the Brazilian C-Bond volume, or more than 5 percent of all emerging market debt trading.

Meanwhile, analysts have noted demand for other Russian bonds, such as MinFin 4. Investors have been wary of the bond, which is considered a Soviet-era debt, fearing that the Paris Club of sovereign creditors may pull it into its own restructuring scheme.

But analysts said the market has already discounted these fears and that Russia will most likely be able to restructure its Paris Club debt while fully paying MinFin 4. The bond has rallied as a result of a massive buyback by the government and its agent banks.

"MinFin 4 could rally further on the back of credible rumors that Russia's negotiations with the Paris Club will begin soon," Troika Dialog wrote in a research note. "There are even whispers within Moscow of a likely start date for the negotiations: the week of Nov. 12. In addition, we are beginning to see demand for MinFin 4 among well-connected Russian banks," Troika said.