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. Last Updated: 07/27/2016

World Bank Asked to Back VEB Bond Issue

WASHINGTON -- Russia has asked the World Bank to provide a partial guarantee on a bond issue by state lender VEB, the World Bank's Russia director, Klaus Rohland, said Monday.

The World Bank would guarantee cash flows on the bond after a certain year, enabling VEB to extend its maturity by several years, he told reporters.

The World Bank would also require a sovereign counterguarantee in order to go ahead, however. The issue may amount to $500 million, but it was still under discussion whether VEB would make a domestic issue or a eurobond.

Russian corporate borrowers, including state-owned firms, have lost access to international capital markets while the domestic debt market has ground to a halt.

"[Finance Minister] Alexei Kudrin wants us to help VEB raise the money in the market," Rohland said. VEB, also known as the Development Bank, is a state corporation created to finance infrastructure projects.

VEB plans to issue $2 billion worth of eurobonds in May on the domestic market and is thought to also be considering an issue for foreign markets.

"At the start, it can be hundreds of millions of dollars; if the first issue is successful it could be billions," Kudrin said after meeting World Bank President Robert Zoellick. The VEB issue could be considered as pilot for other state firms.

VEB's eurobond plans follow hot on the heels of Gazprom's placement this month of $2.25 billion of eurobonds.

VEB, which lacks a formal banking license and therefore does not report to the Central Bank, was also used by the government to throw a lifeline to indebted firms and support the domestic stock market.

Rohland said a guarantee from the World Bank would help VEB borrow on more favorable conditions than if it were to tap capital markets on its own and to obtain a higher rating for the issue, which may even exceed the sovereign BBB rating.

VEB's credit ratings match those of the Russian government.

Rohland said the World Bank was also in discussion with Russian Railways, which is seeking to raise funds for its three-year investment program.

Foreign borrowing by state-controlled firms is expected to open up the market for smaller firms. It also paves the way for a sovereign issue. Russia is expected to issue a $5 billion eurobond next year, turning to the external debt market for the first time in a decade.

Rohland said a World Bank guarantee would knock several percentage points off the bond's yield, reducing VEB's borrowing costs.

The funds raised with the issue would go toward infrastructure projects and support for small and medium-sized enterprises.

Kudrin said Russia would also ask the World Bank for help in financing some of the projects that it can no longer afford.

"Since Russia is entering a period of deficit budgets, and in the next three years the deficit will be significant, we are ready to consider a realization of some projects with the World Bank's financing," he said.