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Comment of Alexey Konochkin, Deputy Head of Debt Capital Markets at VTB Capital, for Bloomberg

8 June 2012

By Denis Maternovsky

June 8 (Bloomberg) -- The biggest surge in ruble volatility since the 2008 financial crisis is causing borrowing to slow after the busiest start to a year on record for Russian corporate bond sales.

OAO Russian Railways, the country’s biggest domestic borrower, delayed its debut sale of inflation-linked bonds in May and is unlikely to return to the market until at least September, said Pavel Ilichev, deputy head of corporate finance.

Companies cut issuance by 58 percent fr om a year ago to 23.9 billion rubles ($740 million) since the start of May, compared with a 39 percent jump to a record 397.2 billion rubles in the first four months, according to data compiled by Bloomberg.

“Right now everyone has hit the pause button until the situation stabilizes,” Ilichev said in a phone interview June 6. “Once volatility kicks in, investors take a break.”

The ruble tumbled more than any other emerging-market currency in May, as the biggest drop in oil prices since 2008 damaged confidence in the world’s largest energy exporter. Implied one-month volatility of the Russian currency against the dollar posted the greatest monthly gain since October 2008.

Russian bonds tumbled 1.4 percent in May, while all emerging markets gained less than 0.1 percent in the period, according to JPMorgan Chase & Co indexes.

Russian companies boosted domestic debt sales at the start of 2012 as Urals crude reaching a three-and-a-half year high and faster-than-expected economic growth in the first quarter increased demand for ruble debt. It is “unlikely” that Russian Railways would sell any debt until at least September because of market volatility due to the fiscal crisis in Greece and a slowdown in activity during August vacations, Ilichev said.

Railway Bonds

The yield on Russian Railways’ ruble Eurobonds due 2019 surged 110 basis points since their sale in March to a record high 9.416 percent on June 5, data compiled by Bloomberg show.

The bonds yielded 9.331 percent yesterday.

The ruble surged 4.4 percent since hitting the lowest level against the dollar on June 1, the biggest four-day gain since February 2009. The currency’s one-month implied volatility, a measure of expected swings against the dollar, jumped to 17 percent in May, up from 8.2 percent at the end of April, the lowest level since July 2011.

“In the environment wh ere the ruble is volatile, corporate financing needs should scale down,” Stanislav Ponomarenko, a fixed-income analyst at Barclays Capital in Moscow, said by e-mail on June 6.

Emerging Markets

Debt sales from all emerging markets globally fell to $76.3 billion in the period since May 1, down 27 percent from last year, according to data compiled by Bloomberg.

It is “highly unlikely” that Russian debt issuance may stall for months even as June 17 elections in Greece and Spanish bank debt problems mean the market will remain volatile this month, according to Dmitry Dudkin, head of fixed-income research at UralSib Financial Corp. in Moscow.

“We see plenty of issuers waiting for the market window to open,” Dudkin said by e-mail on June 6. “If we see a stable situation on the money market for some time and if we see the ruble stabilizing, new issues will quickly re-emerge.”

The ruble gained 0.5 percent to 32.25 per dollar by the 7 p.m. close in Moscow yesterday. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest-rate differentials and allow companies to hedge against currency movements, show the ruble at 32.7637 per dollar in three months.

Ruble Notes

Russia’s dollar bonds due in 2020 rose, pushing the yield 17 points higher to 3.767 percent. The price of country’s ruble notes due August 2016 rose, decreasing the yield 30 basis points to 7.91 percent. The yield on Russia’s ruble Eurobond due in 2018 fell nine basis points to 7.125 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 17 basis points to 244 basis points, up from this year’s low of 160 on March 19, according to data compiled by Bloomberg News.

Russia is rated Baa1 by Moody’s Investors Service, the third-lowest investment grade. The swaps cost 25 basis points less than contracts for Turkey, which is rated four levels lower at Ba2. Russian swaps cost 22 basis points more on Nov. 29. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell nine basis points to 307, according to JPMorgan EMBIG indexes. The difference compares with 218 for debt of similarly rated Mexico and 216 for Brazil, which is rated one step lower at Baa2 by Moody’s.

European Debt

The yield spread on Russian bonds is 97 basis points below the average for emerging markets, the biggest difference since November 2008, according to JPMorgan Indexes.

Europe’s fiscal crisis shut the primary market for Russian government debt for most of May, sending the yield on ruble bonds due in 2027 to 9.09 percent on June 4, its highest since they were sold for the first time in February. The Russian government canceled all debt auctions last month amid worsening market conditions and held its first sale of OFZ bonds since April on June 6, selling 8.7 billion rubles of 2015 notes.

“A successful OFZ placement following a long pause makes one cautiously optimistic about the future of our market,” Alexey Konochkin, deputy head of debt capital markets at VTB Capital, the biggest arranger of Russian domestic debt, said by e-mail yesterday. “We are expecting primary sales to resume as buyers return to the market.”

VTB Capital

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