Russia Ready to Borrow Above 9 Percent

After shunning bond auctions for nine weeks amid the worst quarter for ruble debt since 2011, Russia indicated it's prepared to borrow at more than 9 percent for the first time in almost five years.

In its first auction since July 16, the Finance Ministry sold all 10 billion rubles (US$262 million) of August 2023 notes on offer to a single bidder on Sept. 24 at an average yield of 9.37 percent. Current yields are “acceptable” and the finance ministry plans to fulfill this year's bond sale plan, it said in an e-mailed response to questions on Sept. 26.

“The auction results and the ministry's statement essentially say that it's now prepared to pay more than 9 percent,” Roman Dzugaev, a fixed-income trader at OAO BFA Bank in St.Petersburg, said by e-mail the same day. “That means there will be more supply coming, though not necessarily with demand like we saw at this sale.”

With the government budget surplus running at $23 billion in the first eight months of 2014, Russia refrained from borrowing because of the political premium in the market, where a large supply of new bonds could send borrowing costs still higher, Finance Minister Anton Siluanov said on Sept. 11. Yields surged in the third quarter as President Vladimir Putin's standoff with Europe and the U.S. over Ukraine sparked escalating sanctions and a market selloff.

The ministry last week accepted a yield of more than 9 percent for similar maturity ruble bonds for the first time since October 2009, according to data compiled by Bloomberg. The yield on the 2023 notes was 9.37 percent at 2:49 p.m. in Moscow, compared with 8.38 percent at the end of June.

“The debt market has reached some equilibrium, and we regard current yields as acceptable given the central bank's key rate,” the Finance Ministry's press service said on Sept. 26. “At the same time, we still have an opportunity not to borrow in the market at any price.”

Russian government bonds lost 12 percent in the third quarter in dollar terms, their worst performance since 2011, according to Bank of America Merrill Lynch data.

The ministry aims to sell a further 223 billion rubles of bonds this year, it said. It has raised 134 billion rubles from local-currency bonds this year and placed 100 billion rubles of untradable GSO bonds with the State Pension Fund. This compares with 821 billion rubles borrowed in 2013.

Cutting 'Slack'

While the ruble is sliding to record lows against the dollar, it's boosting the budget balance of the Russian government, which gets half of its income from oil and gas. The currency has weakened 17 percent against the dollar this year, the biggest drop in emerging markets after the Argentinian peso. It dropped 0.8 percent to 39.4935 per dollar today.

“Given that the budget is still in a surplus, the Finance Ministry can give itself some slack,” Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch said by phone from Moscow on Sept. 26. “There will be sporadic placements going forward with low volumes offered.”

The yield on the 2023 bonds fell 38 basis points this month as signs a Sept. 5 truce between the Ukrainian government in Kiev and pro-Russian separatists is holding, fueling speculation that sanctions won't be expanded.

With 13 trading weeks left this year, Russia must sell 17 billion rubles of debt per week to meet the ministry's target, an amount it hasn't sold since Feb. 12, before it annexed Crimea and the U.S. and European Union first imposed sanctions.

“The Finance Ministry will now be offering bonds every week, in a technical auction with a limited number of buyers, like last week, unless the yields exceed 9.5 percent,” Konstantin Artemov, a money manager at Raiffeisen Capital asset management in Moscow, said in e-mailed comments on Sept. 24.

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