Bond issue shows confidence in economy
The Russian government is returning to the international market for the first time since 1998, selling $5.5 billion of bonds at low yields.
That the issue was oversubscribed shows international investors are buying into the Russian growth story. The government's first Eurobond sale for more than a decade was three times oversubscribed. It was split between a $2 billion issue repayable in 5 years and $3.5 billion to be repaid in 10 years.
The yields on the bonds are between 125 and 135 basis points higher than the same maturity debt issued by the US treasury. This is a record low rate for a Russian bond, which not only reflects the renewed confidence in Russia, but also the uncertainty surrounding some more developed economies, according to Dmitry Dudkin, Head of fixed-income research at Uralsib.
“I think the idea of international investors is that Russia is currently back to stable development and that Its bonds are much safer than even some bonds of developed economies like Greece.”
The size of the issue was smaller than expected, with many economists arguing the government had no need for a global issue at all, backed by the world’s third largest fiscal reserves. But Finance Minister Kudrin was keen to press ahead as the sale also presented the opportunity to promote Russia as a stable, growing economy Dudkin added.
“The main point behind this road show was not only to try sell this debt, which was heavily over subscribed for sure, but also to explain to investors that although Russia suffered quite a lot from the crisis in 2009, it’s actually back on track in normal economic development. And if investors want to bet on global recovery than this bet must include Russia as well.”
There is of course still risk. Standard and Poor's gives Russia a credit rating of triple B, that's just two steps above non-investment grade. The main problem is the lack of diversification in the economy.
If the oil price were to fall sharply, this would undermine confidence in the government's debt. But the country is relatively unleveraged and for most economists it is almost unthinkable it could fall into default.