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

24 September 2016
WSJ
Russia Returns to the Bond Market

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Russia overcame sanctions-related hurdles to tap international debt markets Friday, marking a symbolic return to global markets after a previous issue faltered earlier this year.

VTB Capital, the sole organizer of the bond placement, said Russia's Finance Ministry had raised $1.25 billion in 10-year Eurobonds with a 3.99% yield.

Andrey Solovyev, head of debt capital markets at VTB Capital, said the entire placement had been allocated to international investors. The U.S. led the way with 53% of allocations, and the U.K. trailing with 30%. That brings Russia to its target of $3 billion in external borrowing for this year.

In May, Russia fell short of that goal when it raised only $1.75 billion in its first bid for international funding since it was hit by sanctions in 2014 over the Ukraine crisis.

Western banks steered clear of the bond for fear that they could face a backlash from U.S. and European governments.

"I think the decision to give U.S. investors more was both political and commercial: political, to show that U.S. government warnings worked for a short time only, and commercial, to create a more balanced investor base," said Pavel Mamai, co-founder of Promeritum Investment, which has $150 million under management.

International clearing houses such as Euroclear and Clearstream didn't immediately agree to settle the bonds issued in May, raising another hurdle for investors.

The Russian government itself isn't sanctioned, meaning buying or settling bonds isn't a violation of the sanctions regime. In July, Euroclear began settling the bond, removing a stumbling block for international investors.

At a conference in Moscow, Russian Finance Minister Anton Siluanov said Russia planned to raise international borrowing to approximately $7 billion next year, in line with Russia's presanctions global debt.

Russia's latest placement came amid a boom in Russian markets, helped by gains in the oil price and receding inflation.

"Russia might still be an attractive investment, especially for those who are underweight in emerging market risk - we are not in this camp," said Viktor Szabo, Aberdeen Asset Management senior fixed-income investment manager.

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