10/4/16: Russian Bonds Issuance: Some Recent Points of Pressure

Catching up with some data from past few weeks over a number of post and starting with some Russian data.

First, March issue of Russian bonds. The interesting bit relating RUB22.8 billion issuance was less the numbers, but the trend on issuance and issuance underwriting.

First, bid cover was more than four times the amount of August 2021 bonds on offer, raising RUB22.8 billion ($337 million) across

• fixed-rate notes (bids amounted to RUB47 billion on RUB11.5 billion of August 2021 bonds on offer)
• floating-rate notes (bids amounted to RUB25 billion on issuance of RUB9.33 billion of December 2017 floating coupon paper) and 
• inflation-linked securities (amounting to RUB2.01 billion)

This meant that Russia covered in one go 90 percent of its planned issuance for 1Q 2016, as noted by Bloomberg at the time - the highest coverage since 2011. With this, the Finance Ministry will aim to sell RUB270 billion in the 2Q 2016.

Bloomberg provided a handy chart showing as much:

Now, in 2011, Russian economy was still at the very beginning of a structural slowdown period and well ahead of any visibility of sanctions.

Sanctions are not directly impacting sales of Russian Government bonds, but the U.S. has consistently applied pressure on American and European banks attempting to prevent them from underwriting Moscow's Government issues (http://www.wsj.com/articles/u-s-warns-banks-off-russian-bonds-1456362124). Prior to the auction, Moscow invited 25 Western banks and 3 domestic banks to bid for USD3 billion worth of Eurobonds (the first issuance of Eurobonds by Russia since 2013). Despite the EU official statement that current sanctions regime does not prohibit purchases or sales of Government bonds, Western banks took to the hills (at least officially).

The point of the U.S. pressure on the European banks is a simple threat: in recent years, the U.S. regulators have aggressively pursued European banks for infringements on sanctions against Iran and other activities. In effect, U.S. regulatory enforcement has been used to establish Washington's power point over European banking institutions. And the end game was that, despite being legal, sale of Eurobonds was off limits for BNP Paribas, Credit Suisse, Deutsche Bank, HSBC, and UBS, not to mention U.S.-based Bank of America, Citi, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Another dimension of pressure is the denomination of the Eurobond. Moscow wanted Eurobond issued in dollars. However, dollar-issuance requires settlement via the U.S., enhancing U.S. authorities power to exercise arbitrary restriction on a deal that is legal under the U.S. laws (as not being officially covered by sanctions).

Beyond underwriters, even buy-side for Russian Government bonds is being pressured, primarily by the U.S., with a range of European and American investment funds getting hammered: http://www.bloomberg.com/news/articles/2016-03-24/russia-loses-buyside-support-for-eurobond-after-banks-balk.

Russian Government bonds (10 year benchmark) are trading at around 9.26-9.3 percent yield range, well down on December 2014 peak of over 14.09 percent, but still massively above bonds for countries with comparable macroeconomic performance statistics.

Interestingly, there is a huge demand in the market for Russian Eurobonds, as witnessed by mid-March issuance by Gazprom of bonds denominated in CHF (see: http://www.bloomberg.com/news/articles/2016-03-16/gazprom-taps-switzerland-with-russia-s-first-eurobond-this-year).

It is worth noting again that Russian Government bonds are not covered by any sanctions and are completely legal to underwrite and transact in.

Beyond this, the Western sanctions were explicitly designed to avoid placing financial pressures on ordinary Russians. Government bonds are used to fund general Government deficits arising from all lines of Government expenditure, including healthcare, social welfare, education etc, but also including military spending, while excluding supports for sanctioned enterprises and banks (the latter line of expenditure is linked to funds being sourced from the SWF reserves). Given this, the U.S. position on bonds issuance represents a potential departure from the U.S.-stated objective of sanctions and can be interpreted as an attempt to directly induce pain on ordinary Russians (the more vulnerable segments of the population, such as the elderly, children and those in need of healthcare, or as they are termed in Russian - budgetniki - those whose incomes depend on the Budgetary allocations).

This is a sad turn of events from markets and U.S. policy perspectives - placing arbitrary and extra-legal restrictions on transactions that are perfectly legal is not a good policy basis, unless the U.S. objective is to fully politicise financial markets in general. Neither is the U.S. position consistent with the ethical stance de jure adopted under the sanctions regime.