|Russia Yields Fall Before First Bond Sale Since 1998|
|November 05, 2009|
By Laura Cochrane and Denis Maternovsky
A year-long rally in Russia’s international bonds is pushing yields toward record lows as the country prepares to sell debt to foreign investors for the first time since the country’s 1998 default.
After the bonds lost almost twice the average for emerging- market debt in 2008, rates on Russia’s issues have fallen 4.5 percentage points or more from the past year’s highs to within 39 basis points of their lowest ever, data compiled by Bloomberg show. The cost of protecting against a default by Russia dropped more this year than for any other country with an investment- grade rating
Investors are piling into debt sold by the world’s largest energy-exporting nation as gross domestic product starts to rebound from a record 10.9 percent second-quarter contraction and the central bank boasts foreign reserves of more than $400 billion. Demand is growing even after the government’s default on $40 billion of ruble debt in 1998 sent global financial markets tumbling and the five-day war with Georgia a decade later triggered a $300 billion cash exodus, data compiled by BNP Paribas SA show.
“A lot of debtors in 1998 said they’d never touch Russia again, but memory in the bond market is short, so they are all lining up,” said Saleh Daher, the managing director of Boston- based Turan Corp., which owns Russian debt dating back to the Soviet era. “There is a wall of cash looking for investment, in particular in the emerging-market bond world.”
Officials from Prime Minister Vladimir Putin’s government are briefing investors today in London on plans to sell as much as $17.8 billion of debt next year after the first budget shortfall since 1999.
Russia will borrow less than the planned amount next year should the price of oil remain above $58 a barrel, Finance Minister Alexei Kudrin said in London after meeting with bondholders.
Russia is planning to return to international bond markets months after the economy suffered from the global financial crisis.
When last year’s credit freeze prompted investors to flee emerging markets, Russia burned through a third of its reserves in six months, buying $200 billion worth of rubles to make sure the currency’s decline was gradual.
The economy contracted in this year’s second quarter as investment from abroad shrank and the worst global recession since World War II cut fuel demand. Russia’s GDP will fall 7.2 percent in 2009, the European Commission forecast this week. The government predicts a 6.8 percent budget deficit in 2010 after a 7.7 percent shortfall this year, its first in 10 years.
Exit from the government’s economic stimulus measures will “take a few years,” Kudrin said today. During this time, the country will run a budget deficit that will be financed from capital markets, he said. The central bank’s First Deputy Chairman Alexei Ulyukayev said in an interview in London today that there’s a “possibility” of lowering the benchmark refinancing rate further.
Even after this year’s crisis, the economy looks better than a decade ago. The 1998 default that was followed by a more than 70 percent plunge in the ruble and the collapse of some of the nation’s largest banks ended with “one of history’s most powerful turn-around stories,” said Arnab Das, the London-based head of market research and strategy at Roubini Global Economics.
As oil prices increased more than six-fold since the end of 1998 to about $80 a barrel now, down from the July 2008 record of $145, Russia’s sovereign debt load plunged, credit ratings increased and international reserves hit an all-time high of $598 billion. The stockpile totaled $432.8 billion on Oct. 30.
“To their credit, they ran surpluses, and they wisely channeled that windfall into international reserves,” said Michael Gomez, who oversees about $30 billion as co-head of emerging markets at Pacific Investment Management Co. in Munich. “It gave them a cushion to navigate the extraordinary events of 2008 and 2009.”
Moody’s Investors Service gave Russia its first investment grade rating in 2003, followed by Fitch Ratings in 2004 and Standard & Poor’s in 2005. It’s now rated three levels above junk at Baa1 by Moody’s and one level lower at BBB by Fitch and Standard & Poor’s.
The country’s total foreign sovereign debt stood at $38.1 billion as of Oct. 1, central bank data show. Total debt is at 9 percent of GDP this year, down from 63 percent in 2000, according to S&P data.
Even after oil prices plunged to as low $34 a barrel in February, Russia recovered and “exited” its recession, Kudrin said Oct. 20. Preliminary data from the Economy Ministry show that GDP rose 0.6 percent in the third quarter from the previous three months, he said.
“From the last time they borrowed, Russia is a completely different place,” said Ian Hague, a New York-based founding partner at Firebird Management LLC, which oversees about $1.5 billion in assets, much of it in the former Soviet Union. “The kind of yields they were forced to issue at in the past are in a completely different universe; I think they will be able to price somewhere around 6.5 or 7 percent.”
In June 1998, Russia was forced to pay 753 basis points, or 7.53 percentage points, more than Treasuries to borrow $2.5 billion of dollar-denominated debt, with yields at 12.75 percent. In October, the gap on Russia’s 2030 Eurobonds fell below 200 basis points for the first time since the week Lehman Brothers Holdings Inc. collapsed in September 2008, after reaching 892 basis points a year ago, Bloomberg data show.
The premium investors will demand for Russia’s new bonds will be “minimal,” said Alexander Kudrin, a fixed-income analyst in Moscow at Troika Dialog, Russia’s oldest investment bank. “If they were to issue today, a placement of up to $3 billion will be around 220 to 230 basis points,” he said.
The price of credit-default swaps, contracts that pay off if Russia reneges on its debts, is almost at a 12-month low of 190 basis points, falling from 547 basis points a year ago. Of all countries tracked by Bloomberg, only swaps linked to Venezuela, Argentina and Ukraine have fallen more in the same period, Bloomberg data show. All three are rated below investment grade.
“It’s a very solvent country; that would bode well for them being able to raise capital,” Michael Hasenstab, who oversees $45 billion of fixed-income investments at Franklin Templeton Investments, said in an interview in Vienna today. “In the last couple months many countries have been able to raise a significant amount of capital and Russia in terms of its debt sustainability would be on equivalent footing if not better footing than a lot of those countries.”
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