It's time to get 'em while they're hot. Because if Washington foreign policy hawks get their way, buying Russian bonds may very well be subject to the U.S. sanctions regime some day. Monday's issuance of two new bonds -- one maturing in 2027 and the one in 2047 -- is an example of how demand for yield trumps fears of anti-Russia sanctions risk in Europe. It also shows how the market is paying less attention to the political press on Russia matters.
Demand for the $3 billion debt exceeded the supply and will surely push current coupon rates of 4.25% for the 10 year and 5.2% for the 30 year lower later in the day on Tuesday when the government prices them out.
See: Taking A Deeper Look Inside New Russian Sanctions Bill -- Forbes
Putin Tells Oliver Stone When He Thinks US-Russia Crisis Ends -- Forbes
Russia's Ministry of Finance last sold sovereign Eurobonds in September 2016. The $1.25 billion issue was so popular that it was oversubscribed by a factor of six, sending yield to a low 3.9% for what is essentially a junk bond. That's also roughly 120 basis points over the 30 year Treasury bond, meaning investors have given the Russians their full faith in getting paid back.
Russia last issued a 30-year bond in 2013.
The issue comes at a time when Russia faces the threat of deeper sanctions from Washington. The Senate passed an upgrade to the current sanctions regime last week. And while the new bill has not been signed into law, and requires president Donald Trump's Treasury Department to enforce the sanctions approved by the congress, there is no rule to date banning funding of the Russian government via sovereign bond purchases.
However, if the new bill passes as is, and is approved by Trump as is, then the Senate is asking for the State Department, Director of National Intelligence, and Treasury to do an impact study as to whether Russian sovereign bonds and its derivatives can be considered an indirect funding mechanism for government officials currently on the individuals sanctions list.
European sanctions expire in July. Those sanctions ban lending to Russian banks, not the Russian government. With Washington moving ahead fast with a new bill, the market expects Brussels to follow in lockstep and keep sanctioning Russia's biggest banks.
The current level of yields on Russian sovereign Eurobonds sold in the secondary market is not very different from this year's low yield set in May. In other words, Russian bond prices have been in a holding pattern because of monetary policy changes in the core economies and Russia also signalling an end to its own loosening cycle.
In a broadly expected move last week, the Russian Central Bank cut rates by 25 basis points to 9%, but is now starting to sound less dovish. If Russian rates stay put for a while, the latest bond issue becomes another way for Russia to secure long term credit at lower costs than they can get from domestic lenders.
The market is no longer certain Russia's rates are coming down again this year. That means two things. Higher yield in rubles will be a little less attractive if investors start to believe rates will go up. If rates remain unchanged or go higher, Russia will probably come to market again with a new euro denominated bond. "We see the risk or less easing...and think growth in the second half of the year is likely to disappoint, which could lead to another change in tone," says Craig Botham, an emerging markets economist for Schroders in London.
Botham thinks the balance of risks has "altered." He's not alone. The increasing risk of tougher sanctions pose a moderately negative sentiment towards Russian securities in general. But the uncertainty associated with their enforcement, not to mention what the final set list of restrictions will be, means the market is not taking any of this political tit-for-tat too seriously just yet.
For Jan Dehn, head of research at the Ashmore Group, if president Trump does sign a new sanctions bill into law, "Russia goes lower, but not too much lower," he says. Ashmore Group is an emerging markets fixed income specialist. "Sanctions will shift sentiment and shake out some weak hands, mainly in the U.S. But I think others will look to pick up Russian bonds on price weakness," he says.
