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Saturday, 16 December 2017

Russia Eurobond request poses dilemma for banks

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Russia’s decision to issue a request for proposal for a new Eurobond has left banks in a delicate position as the country’s stand-off with Ukraine shows no signs of abating.

While all the leading firms are expected to pitch for the transaction, they will have to weigh carefully the potential damage to their reputation if President Putin maintains troops on the Ukrainian border, or if the situation deteriorates.

Even if sanctions from the US or EU don’t forbid banks doing business with Russia, senior managers may begin to feel uncomfortable especially in case they are portrayed as supporting a rogue regime.

“We’re aware of the risks but we’ll put in a response and see how things develop,” said one senior banker ahead of this afternoon’s deadline. The responses must be delivered in hard copy to the Ministry of Finance by 1400GMT.

Another said that given the importance of Russia to their global business, most foreign banks face a tricky balancing act.

“I doubt anyone wants to second guess politics so we will proceed as usual until told otherwise by management or [in the] worst case, sanctions preclude us doing business.

“At end of the day most big international banks have a decent presence on the ground in Russia so I doubt anyone will make any hasty decisions.”

Some argue that with the Obama administration taking the lead on possible sanctions against Russia, US banks are under most pressure. “It will be a key test for US banks, as this deal would likely put any bank mandated at the top of the new issuance league tables,” said Tim Ash, head of EM research ex-Africa at Standard Bank.

But others point out that European banks are just as vulnerable. “It’s not just a US banks issue. If sanctions come into play it would impact any bank with a presence in the US,” said one capital markets official. He added, moreover, the EU is also considering applying restrictions.

So far sanctions talk has revolved around travel bans and asset freezes on people and firms accused of violating Ukraine’s sovereignty rather than anything more widespread.

Statement of intent

While Russia has long signalled its intention to raise up to US$7bn in the international bond markets this year to fund its budget, some were still startled by the timing of the two-page RFP.

“I thought ‘you’ve got to be kidding me’,” said a debt markets banker. “Everyone will pursue it but you do wonder whether they’ve deliberately put it out there for someone to say they can’t reply.”

Another reckoned it is more a statement of intent from the Russians, which is considering issuance in both the euro and dollar markets. “If they delayed it would imply some sort of concern about their ability to fund. It’s not the done thing in Russia to step down. The important thing is to demonstrate strength.”

Others, though, say the mandate is a technocratic process that is divorced from the bigger political picture. “There’s a process in the Ministry. Once it was set in motion there was no point in stopping it,” said another debt banker. “In any case, I wouldn’t interpret it as an immediate intent to issue.”

Indeed, bankers reckon that even if there was no geopolitical crisis, it would probably take the Ministry at least two months to be in a position to go ahead with the transaction. A long-list of potential underwriters will need to be cut to a shorter one before the final choice is made.

Russia will also have to file the necessary documents and quite possibly undertake a roadshow as well. Last year there was a gap of nine months between the sending of the RFP and the actual deal. Russian officials failed to respond to questions sent by IFR for this article.

Little appetite

The other challenge facing bankers is assessing what sort of access Russia has to the capital markets and the premium it would have to pay. The yield on the sovereign’s benchmark 2023 dollar Eurobond has widened by 130bp since mid-January to be quoted at 5.73% on Friday, according to Tradeweb.

Investors, mindful of the need to protect their portfolios - and their reputations - are hardly champing at the bit to buy Russian-related debt, despite the attractive valuations.

“In the current situation, there is very little appetite for Russia, no matter whether sanctions are in place or not. People have more to sell, so any tightening in spreads will be followed by more selling,” said John Taylor, fixed income portfolio manager at AllianceBernstein.

“It would take at least three months after a potential solution to the crisis in Ukraine for people to get comfortable again,” he added.

But although there are overwhelmingly more sellers than buyers of Russian-related debt, some are taking a punt. In the week beginning March 3, the day that fears of a military intervention peaked, the country’s biggest lender, Sberbank, sold two five-year Eurobonds through private placements, one raising US$500m at a yield of 4.15% and the other €500m at 3.08%.

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