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. Last Updated: 07/27/2016

Renewed Love Affair May Breed International Bonds

LONDON — International bond investors’ renewed love affair with Russia means that a return to the capital markets to refinance debt falling due next year is a real possibility, London bankers said Thursday.

Following remarks by Finance Minister Alexei Kudrin on Wednesday, they said Eurobond prices already reflected a reversal of sentiment toward Russia, which defaulted on billions of dollars of domestic and external debt after its economy crashed two years ago.

Prices on Russian Eurobonds have risen sharply in recent months as Russia has made peace with disgruntled Soviet-era creditors and seen rocketing oil and commodities prices push foreign exchange reserves to record levels. On Thursday, its 2003 Eurobond was trading at more than 97 percent of face value, having climbed steadily from 74 percent at the turn of the year.

Holders of Russia’s $16 billion of Eurobonds, issued from 1997 onward, were exempted from its demands for debt forgiveness on the grounds that they were sovereign obligations of the Russian Federation rather than the defunct Soviet Union. Russia’s insistence that it will service the bonds in full now appears to have won the market’s confidence.

Speaking after he had unveiled a balanced draft budget for 2001, Kudrin said Wednesday that the country would need to borrow to cover next year’s foreign debt obligations. Funding sources could include official lenders such as the World Bank and International Monetary Fund.

Kudrin declined to give a target figure, and hinted that commercial borrowing depends on an improvement in the country’s credit ratings.

"Eurobonds will depend on market conditions and the outcome of talks with the Paris Club. Russia needs to raise its rating so that interest rates would not be a burden for the budget," he said.

Russia’s Eurobonds were upgraded from default levels after the London Club of commercial creditors agreed in February to restructure around $32 billion of Soviet-era debt, but are still rated a lowly B.

The London Club deal, which will write off about one-third of the debt and repackage the rest into a new 30-year Russian Federation Eurobond, is due to close Friday, with the actual exchange scheduled for Aug. 25.

Dealers say demand for Russian Eurobonds has intensified ahead of the swap, which is seen as a watershed in the relationship between President Vladimir Putin’s regime and international lenders. Other fully serviced assets such as the MinFin 4, a star performer in recent weeks, have also benefited.