Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Russia Buys Time With $2Bln Loan




After several harrowing weeks in the financial wilderness, Russia won a strong vote of confidence from foreign investors Thursday, borrowing $2.5 billion on international bond markets.


The success of the Eurobond sale far exceeded the government's original plans to raise only $1.5 billion. While the interest rate of 12.75 percent on the loan was relatively high, the money will help ward off a looming short-term debt repayment crisis.


"This is ample demonstration that Russia is capable of getting money from private foreign investors," said Andrei Yashchenko, head of research at the Montes Auri brokerage.


Russia has been forced to pay interest rates of more than 60 percent on its ruble bonds in recent weeks as foreign investors, spooked by the crisis in Asia, have exited emerging markets.


While the Eurobond eases some of the pressure on the government to meet its short-term debts, markets would still like a big International Monetary Fund loan to protect the ruble against speculators.


But the IMF has not promised a big loan to save the ruble and Thursday it postponed until next week a meeting to consider releasing a $670 million loan tranche to Russia under an existing program to fund the government.


It said the postponement would allow Russia to implement a package of austerity measures designed to meet the financial crisis. The IMF says it will not help Russia until it has proof that the government is serious about economic reforms.


Anatoly Chubais, appointed this week as a special presidential envoy to the IMF, downplayed the delay and said negotiations with the IMF on the release of the tranche and a "big loan" would be held next week.


"I think there should be serious talk about resources in the range of $10 billion to $15 billion," Chubais said Thursday, finally confirming that Russia has asked the IMF for a ruble bailout package.


In a sign of defiance to the IMF, however, Chubais said Russia will not borrow "at any price."


The hitch with the IMF took some of the steam out of the Eurobond results, the biggest of Russia's six previous attempts to tap international capital.


"This is definitely a setback, because these sorts of postponements are extremely rare, and Russia's current situation cannot be described as strong," said Eric Fine, an emerging markets analyst at Morgan Stanley in London. "There is an element of negotiation strategy here." Finance Minister Mikhail Zadornov said Thursday that all the money raised by the Eurobond will be used for restructuring domestic debt.


The bonds were sold to yield 12.75 percent, or 753 basis points above U.S. Treasuries, a price analysts said was high enough to attract investors. While the yield is higher than those offered by other emerging markets, it is substantially lower than the 60 percent on domestic bond markets.


"It's very good for Russia in terms that it allows Russia to substitute longer-dated dollar debt for shorter and more expensive ruble debt," said Stuart Brown, head of emerging markets research at Paribas in London.


Thursday's 30-year Eurobond, placed by J.P. Morgan and Deutsche Bank without the customary roadshow, comes hard on the heels of a $1.25 billion five-year Eurobond issued June 3 at the height of the financial crisis. That issue paid yields 695 basis points above U.S. Treasuries, which trade at 5.5 percent annually.


Analysts said Thursday's Eurobond was helped by the U.S. Federal Reserve's intervention Wednesday to strengthen the Japanese yen, whose persistent weakness has fuelled fears of a spate of currency devaluations in Asia and put pressure on all emerging markets currencies.


Analysts acknowledged, however, that continued investor interest in Russian Eurobonds will depend on the negotiations with the IMF. "The underlying assumption is that the IMF will provide funds soon," Paribas' Brown said.


The government needs to raise money to meet its debt servicing commitments which will amount to $30 billion by year end.


While the government usually rolls over maturing ruble debt by placing more ruble debt, spiralling yields on domestic bond markets prompted the government earlier this month to increase its plans for Eurobond issues this year from $3.5 billion to $6 billion.


"[$2.5 billion] will hold them for quite some time, said a Western analyst who requested anonymity. "It should relieve pressure from local markets as well as the ruble."


But Brown noted the Eurobond, priced lower than previous issues, has also caused "consternation" among holders of previously issued Russian debt. "It's a mixed bag for investors, who are being forced to sell their existing holdings," he added.


In Moscow, the markets closed on a cautious note. The Moscow Times Index of 50 leading shares fell 4.7 percent after an early rise, closing at 135.32 points.


On the bond market, yields on some government securities fell by more than 20 percentage points, but analysts attributed the rally to pent up demand caused by the cancellation of Wednesday's bond auctions. Yields on the benchmark one-year treasury bill averaged 55.49 percent down from Tuesday's 68 percent.