Press about us

28 June 2013

Sovereign Eurobonds: has Russia missed its best chance?

The Russian sovereign is a notoriously inflexible and aggressive issuer – but a much sought-after client. It has yet to pull the trigger on its 2013 bond issue but could press ahead soon, betting on further US Treasury rate rises, or hold off, in anticipation of a fall. Francesca Young looks at how the country will deal with the challenge of EM volatility.

The Federation of Russia is the issuer that bankers and investors I love to hate. It prints huge liquid Eurobonds – when this year's eventually appears, it could be for around $7bn. But it also pays low fees, takes a long time deciding mandates and prints so tightly that it sometimes scuppers its own secondary market performance.

None of this usually seems to do it much harm. Investors cannot ignore the name and bankers still jump through as many hoops as it lakes to win mandates.

This year, however, the sovereign's inflexibility may have cost it dear even before it has released price guidance. Russia was originally expected to sell its Eurobond in the first quarter but pushed its plans back to the second quarter for reasons that bankers struggle to pinpoint. Analysis now reckon it may not issue until autumn.

It mandated banks in June – this year it is Barclays, Deutsche Bank, Royal Bank of Scotland, VTB, Gazprom-bank and Renaissance Capital that are being honoured. But rising US Treasury rates are forcing up the yield that it is likely to have to pay.

The catalyst for the latest bout of volatility was the indications fr om Federal Reserve chairman Ben Bernanke on May 22 that it could begin reducing quantitative easing this year if the US economic recovery gathered strength. Ten year Treasury yields spiked above 2% after his comments and had touched 2.18% by the start of June. Just one month earlier they had been at about 1.6%.

The sell-off picked up pace in late June, when Bernanke repeated the Fed's plans, adding that the country could look to stop QE altogether by the end of the first half of the year. The market turmoil has hit emerging market bonds particularly hard, but liquid sovereigns like Russia had suffered worst because their tighter spreads offered less cushion to absorb Treasury rises.

In early May, Russia's 2022s were trading at a yield of 2.8%. By the start of June, that yield had hit 3.5% and bankers at the time reckoned that about half of that widening was due to the shift in Treasuries. Some said that the sovereign might choose to wait to see if that might reverse, but the risk is that the opposite will happen.

Andrey Solovyev, global head of DCM for VTB Capital, told EuroWeek before the latest sell-off that his firm's advice was for the sovereign to come sooner rather than later, arguing that continued rate rises could change investors' views of EM in the second half of the year.

The historical context of the current yields makes decisions on timing not quite so dear-cut, however, Compared to where they have been in the past, Russian sovereign yields are still low, even with some selling pressure now. Its $2bn 2022s were placed in March 2012 at a coupon of 4.5% – and are still trading 100 bp below that.

In addition, the country has $480bn of FX reserves and so is under no pressure to issue. That, in turn, makes it unlikely to be willing to offer a juicy new issue premium whatever the market environment.

"The credit quality of the Russian sovereign is undisputed," says Vladimir Potapov, chief executive of VTB Capital Investment Management in Moscow. "After 2008 it was viewed as being in much better shape than many other countries, with no Eurobond defaults from it throughout the crisis. So the appetite for Russian sovereign debt this year will simply be linked to die yield it offers."

One at a time

Russia has become infamous for printing only one deal a year. After its $5.5bn dual tranche return-to-market trade in 2010, it sold a Rb90bn ($2.74bn) seven year in 2011 – a Rb40bn new issue and Rb50bn tap – and then a $7bn triple tranche Eurobond in 2012.

In 2010, its aggressive style was heavily criticised after the deal sold off by several points immediately after pricing. But its last two have been much better received.

"Russia's 2010 issue was tricky – the market was volatile and it was forced into it a little," says a banker who has been mandated for the upcoming deal. "The more recent two have been a lot smoother; the market environment has been better."

Some, such as Solovyev, say that it is important that the sovereign continues to stick to its strategy of doing all of its funding in one strike each year. "The market has got used to it doing one deal a year and that restraint helps pricing for its own debt and for corporate and FI issues from the country."

Michael Ganske, head of emerging markets at global fixed income specialist Rogge Global Partners, disagrees. He says it would be more investor friendly for Russia to become a frequent issuer and borrow smaller amounts throughout the year. And this year's volatility could provide Russia with the perfect reason to switch to this method.

It would be much better for the sovereign to spread out its bond issues throughout the year than to print a massive amount like S7bn in one go," he says. "Every year the secondary market sells off before the new issue because there's such a huge amount coming."

He argues there is no Investor friendly reason for the sovereign to print so much all in one go.

"Russia is a fantastic recovery story but it's made them arrogant about what they can do in the capital markets." he says. "The reason that they do their bond issue all in one go is because they can and its easy. It also gives them an advantage in some ways to not be viewed as a frequent issuer."

An origination official in London agrees that the main reason is convenience for the issuer. "Look how long it took to mandate for the deal this year," he says. "If that process was happening three times a year u would be laughable. The market will give them $7bn in one go, so why not just take it?"

The deadline for responses to the RFP for this years mandate was January' 10, but it was another six months until the banks were publicly mandated. It is not unusual for the process to be long for EM sovereigns, but Russia is seen as a sufficiently big and sophisticated issuer to be able to move faster and take advantage of market windows.

Euroclearability excitement

One thing bankers do agree on is that there is no pressing reason for Russia to diversify the currency of its bond issues. As an oil-based economy. Russia needs dollars more than any other foreign currency. And the dollar market also offers the deepest pool of liquidity.

"The sovereign plans to come to the market regularly and will probably look to do different currencies at some point, but it will probably only do that when it needs those other currencies." says ал origination official. "For the moment, the sovereign has done 10 and 30 year bonds and could look to develop its curve further in dollars."

However, the focus for the country's debt this year has not been on the dollar market but on the domestic. OFZs – medium and long-term Russian domestic government bonds –became Euroclearable in February, making it easier for foreigners to buy them.

This partly explains why yields on OFZs have fallen by more than 100bp, to below 7%, and over S40bn of foreign money is set to enter the Russian domestic market by the end of 2013. But as Denis Poryvay, an analyst at Raiffeisenbank International in Moscow explains. Euroclearability is not the only reason for the tightening of OFZs.

"The huge rally in OFZs was not just the effect of Euroclearability but also of US quantitative easing," he says. "There was a lot of speculative money that flowed into the local market to pick up a higher yield. Because of chat, though, there's no further yield tightening expected in OFZs."

For the sovereign, the domestic market cannot replace the attractions of dollar Eurobonds, however. "The sovereign is already an active issuer in domestic bonds, but it's still much cheaper for them to issue in dollars," says Ganske. "As Russia is a dollar-based commodity economy, it will continue issuing in both currencies."

Lots of oil, less governance

Despite improvements in the country's capital markets, Russia's credit story still has some obvious weak points – the fact that its economic fate is shackled to global oil prices is one.

In 2008 oil crashed to a low of S30.28 a barrel and Russia's bond markets were plunged into turmoil. The primary market shut up shop and the country spent its FX reserves propping up its banks and corporates as their yields spiked to double digit levels.

There was much talk at that time of the country diversifying from oil and gas to avoid a similar problem in the future. But little progress has been made. If the eurozone crisis reaches a messy conclusion, Russia's continued vulnerability to an oil price crash could be shown again.

Ganske notes, however, that a change in Russia's FX policy has helped. The government is now much more comfortable with a fluctuating rouble – and that means the country has the flexibility to soften moves in oil prices.

For example, if oil were lo fall from SI00 a barrel (wh ere it was at the start of June) to $80. Russia's central bank could halve that fall in rouble terms by simply allowing the currency to depreciate by 10%.

It also means that the country can effectively target inflation rather than fighting to keep the rouble stable." adds Ganske.

Many Russia-watchers argue that the biggest problem the sovereign faces in the market is questions over governance and the rule of law. Ganske agrees this is a much bigger problem than the dependency on oil or the perception of president Vladimir Putin as an autocrat. But he also worries about the increasing market dominance of government controlled entities.

Such a situation can, in turn, hurt the perception of the country as a credit. "If Russia could sort out these issues, FDI would go up and capital would come into the country, and that helps everything perform as an investment, including the sovereign."

Traditional EM investors no longer put Russia in the frontier market category, and it has benefited from the eurozone crisis as money has fled to the stronger EM names in search of yield at an acceptable risk. The current volatility is likely to push the country's yields up, but bankers hope this will encourage it to adopt more measures that would help bring down its spreads. If that happens, it will no longer seem fanciful to imagine it leaving the EM sector altogether. 

Corporate Communications VTB Capital

The information and opinions contained within VTB Capital research reports are prepared by research analysts associated with JSC VTB Capital, VTB Capital plc and their non-U.S. affiliates (each such entity, a “VTB Group entity,” and all such entities collectively, the “VTB Group”). The information, analytic tools, and/or models referenced herein (and any reports or results derived from their use) are intended for informational purposes only. VTB Capital has no obligation to update this information and may cease provision of this information at any time and without notice. The information and opinions described herein may be based on VTB Capital research reports that have already been published and made available to research customers. Accordingly, members or clients of the VTB Group may have acted upon or used the information or conclusions contained in this research report, or the research or analysis on which they are based, before its publication.


This material does not constitute nor is it intended as an offer, inducement, promotion or solicitation for the purchase or sale of securities, investments or other financial instruments. Neither the information contained in the report nor any future information made available with the subject matter contained in the report will form the basis of any contract. This material is not intended to constitute an investment recommendation as defined by Article 3(1) (35) of Regulation (EU) No 596/2014, and related rules and regulations (each as amended). VTB Capital is not acting as a fiduciary. VTB Capital does not provide, and has not provided, any investment advice or personal recommendation to you in relation to any transaction and/or any related securities described herein and is not responsible for providing or arranging for the provision of any general financial, strategic or specialist advice, including legal, regulatory, accounting, model auditing or taxation advice or services or any other services in relation to the transaction and/or any related securities described herein. Accordingly, VTB Capital is under no obligation to, and shall not, determine the suitability for you of any transaction described herein. You must determine, on your own behalf or through independent professional advice, the merits, terms, conditions and risks of any transaction described herein. Any reference to past performance of securities or other financial instruments is for informational purposes only and does not imply or indicate future results.


VTB Group entities do and seek to do business with companies referenced in research reports. Thus, investors should be aware that the VTB Group may have a conflict of interest that could affect the objectivity of this research report. Disclosures on the companies referenced in this report can be obtained by accessing the following webpages:

Research disclosures webpage -

Investment Recommendations disclosures webpage


Whilst every care has been taken in preparing the reports, no research analyst, director, officer, employee, agent or adviser of any member of the VTB Group gives or makes any representation, warranty or undertaking, whether express or implied, and accepts no responsibility or liability as to the reliability, accuracy or completeness of the information set out in the reports. Any responsibility or liability for any information contained in the reports is expressly disclaimed. All information contained in the reports is subject to change at any time without notice. No member of the VTB Group has an obligation to update, modify or amend the reports or to otherwise notify a reader thereof in the event that any matter stated in the reports, or any opinion, projection, forecast or estimate set forth in the reports, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn.

In the United Kingdom, the reports are approved and/or communicated by VTB Capital plc, a bank authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The reports are intended for those persons that would be classified as eligible counterparties or professional clients under the Financial Conduct Authority’s Conduct of Business rules. The reports have been made publicly available, and as such, constitute an ‘acceptable minor non-monetary benefit’ pursuant to Article 12(2) Commission Delegated Directive (EU) 2017/593 (as implemented into United Kingdom domestic law and regulation following the United Kingdom’s departure from the European Union). The reports do not intend to communicate an invitation or inducement to engage in investment activity, and as such do not fall within the definition of a Financial Promotion as per s.21 of the Financial Services and Markets Act 2000 (FSMA), and related rules and regulations (each as amended).

Reports are distributed in the European Economic Area (EEA) by VTB Bank (Europe) SE, registered with the number HRB 12169 at the register of companies in Frankfurt am Main and authorised by the Bundesanstalt fur Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority), Graurheindorfer Strasse 108, 53117 Bonn, Marie-Curie-Strasse 24-28, 60439 Frankfurt am Main and the European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main to provide banking transactions and financial services. Reports are intended for those persons classified as Eligible Counterparties or Professional Clients pursuant to Directive 2014/65/EU. In the United States, these reports are intended for persons who are considered ‘institutional investors’ as defined by FINRA Rule 2210(a)(4).

In Singapore, the reports are distributed by VTB Capital plc to accredited investors, expert investors or institutional investors only (as defined in the applicable Singapore laws and regulations and are not intended to be distributed directly or indirectly to any other class of person). Recipients of these reports in Singapore are to contact VTB Capital plc, Singapore branch in respect of any matters arising from, or in connection with, this report. VTB Capital plc, Singapore branch is regulated by the Monetary Authority of Singapore.

In Hong Kong, the reports are distributed by VTB Capital Hong Kong Limited, a licensed corporation (CE Ref: AXF967) licensed by the Hong Kong Securities and Futures Commission to “professional investors” (as defined in the Hong Kong Securities and Futures Ordinance and its subsidiary legislation) only.

In Russia, the reports are approved and/or communicated by JSC VTB Capital, a professional securities market participant regulated by the Central Bank of Russia. VTB Capital is not providing either investment advice or individual investment recommendations to the recipients of the reports or any other persons either under Federal Law On Securities Market of 22.04.1996 No. 39-FZ (or related rules and regulations, each as amended) or otherwise. These reports are not advertising as defined in Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Research reports do not constitute a personalised investment recommendation as defined in Russian laws and regulations, are not addressed to a specific client, and are prepared without analysing the financial circumstances, investment profiles or risk profiles of clients.


The reports are being furnished to certain persons as permitted by applicable law, and accordingly may not be reproduced or circulated to any other person without the prior written consent of a member of the VTB Group. Unauthorised use or disclosure of the reports is strictly prohibited.

By clicking ‘Confirm’ you attest that you are either a professional investor or eligible counterparty and agree to our terms of access as described above. If you are not considered to be a professional investor or eligible counterparty, please click ‘Decline’ and you will be reverted back to the VTB Capital website.