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Comment by Andrey Solovyev, Global Head of DCM at VTB Capital, for Wall Street Journal

25 May 2016
WSJ
Russia Eyes Another Bond Sale After Falling Short of Target; Russian government’s borrowing plan envisages raising $3 billion from global markets this year

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Russia could tap the global capital markets again later this year, bankers said Wednesday, after its first Eurobond since the West applied sanctions two years ago fell short of the government's $3 billion borrowing target.

Russia on Tuesday said it sold $1.75 billion in dollar-denominated debt, which officials praised as a sign of investor interest in the country, even as many Western portfolio managers stayed away due to concerns over compliance and settlement issues.

“We came out to confirm our presence on the market—a long absence is bad for an issuer—and to probe investors' attitude as well as to understand our capabilities," said Konstantin Vyshkovsky, head of the state debt department at the Russian Finance Ministry, state news agency TASS reported.

Andrey Solovyev, head of debt capital markets at VTB Capital, the sole operator of the Eurobond placement, said Russia may see an opportunity to tap global markets once again after the summer.
“Summer is going to be traditionally calm. In the fall, there will be an opportunity [to tap the market again]. It would be logical to do it in the third or fourth quarter," Mr. Solovyev said in an interview.

The Russian government's borrowing plan envisages raising $3 billion from global markets this year to help cover a budget shortfall triggered by weak prices for crude oil, Russia's main export and a large source of state revenue.

Mr. Solovyev said that the latest 10-year Eurobond will first have to find an equilibrium price, and then the finance ministry may sell another one, but with a smaller premium to the secondary market.
Russia said it sold $1.3 billion of the bond outside of Russia, although investors said this figure could have been bolstered by Russian offshore funds. Mr. Solovyev said he won't disclose names of those who bought the bond in order not to put them in an uncomfortable position.

Western authorities, particularly the U.S., have repeatedly warned of the risks related to having business with Russia and to buying its Eurobond, even though Russia's deal notice said the proceeds would be used for general government purposes and wouldn't be used to violate U.S. and EU sanctions.
After placing the Eurobond, Russia reiterated its intention to engage global clearing houses in future issues.

Andrei Kostin, chairman of state-run VTB bank, said he hoped that negotiations with Euroclear PLC, an international clearing system, would be successful in the future, which would boost demand for Russian bonds. The finance ministry said it is in talks with Euroclear.Euroclear and Clearstream, another clearing firm, have so far declined to comment on the bond sale that Russia unexpectedly announced on Monday. The bond's prospectus said it would be settled through Russia's National Settlement Depository.

The absence of the international clearing firms sparked skepticism among investors over the papers' liquidity. “Although the move is a positive step towards restoring investor confidence in the sanctions-hit country, the issuance of Russia's first Eurobond since sanctions were imposed in 2014 has not proceeded smoothly, as the issue is not eligible to settle through Euroclear and Clearstream, which are the main systems for clearing international bonds," said Mihir Kapadia, chief executive at London-based firm Sun Global Investments. The unexpected fashion of the bond deal also lead to increased cautiousness, investors say. Russia had kept in secret the plan to place the dollar-denominated Eurobond and didn't close the book on Monday, the day of the announcement, to give Asian investors an opportunity to participate in the deal, Mr. Solovyev from VTB Capital said. Russia closed the books late on Tuesday and the Eurobond will be settled on Friday, under the T+3 mechanism.

Source

VTB Capital

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