The Ministry of Finance chose a favourable moment to enter the international market

Earlier this week, the Russian Ministry of Finance began attracting foreign loans. The first step was the placement of 10-year government bonds in the amount of $1.75 billion.

According to the Finance Minister Anton Siluanov, the total order book amounted to about $7 billion which exceeds not only actual, but also the maximum permissible size of equity offering ($3 billion) more than twice.

Let us recall that in early February, the Russian Ministry of Finance filed applications for placement of Eurobonds in 25 foreign and 3 Russian banks (including Barclays, BNP Paribas, Bank of America Merrill Lynch, Bank of China, Morgan Stanley, Goldman Sachs, Credit Suisse, Citigroup, VTB Capital, Gazprombank, Sberbank CIB). As a result, more than 70% of Eurobonds were purchased by foreign investors. It was not prevented even by the fact that the placement of the bonds was carried out not through the international systems Euroclear and Clearstream, but through the National Settlement Depository, which hypothetically meant higher operating and reputational risks. However, dollar-denominated government bonds were successfully placed at 4.75% per annum. In autumn 2013, Russian dollar-denominated 5-, 10- and 30-year Eurobonds were placed at 3.5%, 4.875% and 5.875% per annum respectively, and euro-denominated 7-year Eurobonds – at 3.625% per annum.

The Russian Finance Ministry’s return to the international capital market after a three-year pause can be considered a total success for both investors and the issuer itself.

Foreign investors are pushed to search for more profitable, although riskier securities by the policy of central banks that maintain zero and, in some cases, negative interest rates. In most developed countries, long-term government bond yields are close to zero, and short-term ones are even negative. For example, the average yield of 7-year government bonds of Euro-area countries is only slightly higher than 0.5% per annum; given AAA credit rating – 0.05% per annum. The yields of US Treasury bonds are somewhat higher: it is 1.26% per annum for 5-year bonds, 1.81% per annum for 10-year bonds, and 2.62% per annum for 30-year bonds.

Low, and in some cases negative, interest rates on relatively reliable government securities supported by super soft monetary policy of developed countries’ central banks contributed to the competitive attractiveness of Eurobonds placed by the Russian Ministry of Finance. The prospect of changes in major central banks’ monetary policies and, most notably, the expected further increase of the key interest rate by the US Federal Reserve System will lead to a change in foreign investors’ preferences, and, accordingly, to a decrease in the potential demand for Russian bonds. In our opinion, the Russian Ministry of Finance chose a very good moment for returning to the international capital market.

Anna Kiyutsevskaya – researcher