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. Last Updated: 07/27/2016

French Investors Wary of Eurobonds

A Russian official delegation visiting Paris on Wednesday to tout the country's upcoming Eurobond issue to French investors can expect a very mixed welcome.


For many in France, the Eurobond is a painful reminder of the billions of francs French savers lost when the Soviet government cancelled tsarist-era "Imperial bonds" immediately after the 1917 revolution.


"Hundreds of thousands of French borrowers from all social classes lost their savings in one day," Pierre de Pontbriand, president of the Association of French Holders of Russian Bonds, said in a telephone interview Tuesday.


"Some lost their whole fortune, their house and their land with these bonds," said Pontbriand, whose group represents the interests of 300,000 French savers whose estates still hold the Imperial bonds. The paper was denominated in gold francs and has a nominal value of $7 billion to $8 billion (35 billion to 40 billion francs) in 1996 money, he said.


The association has mounted an active campaign in the international media and with the French government opposing the Eurobond's issue before the pre-revolution bondholders are compensated.


But despite these bad memories, a Russian government delegation headed by Deputy Finance Minister Oleg Vyugin will be in Paris on Wednesday as part of a tour of world financial markets to promote the bond issue, and some analysts are prepared to embrace the new paper.


Russia is seeking to raise as much as $500 million later this month in its first post-Soviet foray into the international capital markets, where borrowing costs are far lower than on the domestic government securities market.


To give French investors more confidence in the Eurobonds, Russian Finance Minister Alexander Livshits promised earlier this month that an agreement on the tsarist bonds was "imminent."


Jochen Wermuth, head of the Finance Ministry's economic expert group, said "the question will not be settled in time before the launching of the new Eurobonds," scheduled for between Nov. 21 and Nov. 25.


But the issue is on the agenda for a prime ministerial meeting in Paris at the end of November and is expected to be resolved then, according to French and Russian media reports.


The drive for easy profits from the Eurobond appears likely to triumph over the Imperial bondholders' objections.


"The French have turned the page," said Natalia Armantaro from the emerging markets securities sections at Banque Paribas. "In my view, what they will mostly see in these Eurobonds is an easy way to make money quickly. I believe this borrowing should be successful," she said.


But de Pontbriand of the French bondholders' association said the fact that the Eurobond will be issued without past debts having been cleared is a "provocation" for holders of the tsarist debt. "So long as an agreement on the question has not been reached, we will not accept the issuing of a new Russian bond ... and we are going to warn investors throughout the world about the risks attached to them," he said.


Warnings by the association have been published in international media such as the Financial Times, The Economist and The Wall Street Journal. The advertisements stress that "subscribing to such bonds entails very considerable risks."


On the question of compensation, the difficult task will be to evaluate the compounded interest on the bonds over the past eight decades.


Pontbriand said the sums the Russian government owes French bondholders are astronomical. If all the bonds were paid today with interest, it would represent two-thirds of France's annual 1-trillion-franc budget, he said.


Although full compensation seems unlikely, Wermuth said the French savers can expect to get something out of the ongoing negotiations between the French and Russian governments.


Billions in French savings were used to finance Russia's industrialization, particularly some 70,000 kilometers of railroads.