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Russia's Eurobond Catches a Wave Hours After Dovish Fed Turn

Russia's Eurobond Catches a Wave Hours After Dovish Fed Turn

(Bloomberg) --

Russia couldn’t have timed it better.

After facing souring geopolitics at its last two Eurobond sales, the Finance Ministry turned to the foreign debt markets just hours after U.S. Federal Reserve Chairman Jerome Powell gave the emerging-market rally fresh impetus.

Russia set the size of its offering of 16-year bonds at $3 billion and the yield at 5.1 percent, according to a person with knowledge of the deal who asked not to be identified because the details aren’t public. The ministry is also tapping its 2025 euro-denominated notes for 750 million euros ($853 million) at a yield of 2.375 percent. State-run VTB Capital and Gazprombank are organizing the deal.

Russia's Eurobond Catches a Wave Hours After Dovish Fed Turn

“The Finance Ministry is seizing on the moment,” said Yakov Yakovlev, a fixed-income analyst at Aton LLC in Moscow. “It’s risk-on in global markets after the Fed, plus the sanctions rhetoric has quietened down.”

Read More: Russia’s Return to Eurobond Market Comes With Compelling Yields

While a U.S. bill to sanction Russia’s new sovereign bonds has kept some big foreign investors cautious since it was first introduced to Congress last year, Morgan Stanley said this week it’s “overcoming” concerns about the possible penalties and recommended going long on the ruble. Moody’s Investors Service promoted the world’s biggest energy exporter back to investment grade earlier this year, citing Russia’s resilience to U.S. restrictions.

Placements Past

A year ago, Russia was marketing its foreign debt amid an international scandal over the nerve-agent poisoning of an ex-spy in the U.K. Eight months later, another offering went ahead on the heels of a naval clash with Ukraine in the Kerch strait. Both placements were ultimately successful as investors closed their eyes to the geopolitics and concentrated on Russia’s high yields, investment-grade credit score and almost half a trillion dollars of foreign-currency reserves.

Thursday’s timing is reminiscent of Russia’s foreign offering in September 2016, when it returned to the Eurobond market less than a day after the Fed kept rates unchanged and scaled back its projections for hikes the next year. Back then, the nation’s finances were weaker as it struggled with recession and a budget deficit.

“Russia does not really need this money for the time being, given the current level of the oil price and the prudent management of the budget,” said Sebastien Barbe, head of emerging markets research at Credit Agricole CIB. “But they may need it if the oil price moderates for one reason or another later on, particularly as growth is softening and the Putin administration is planning to stimulate investment in coming years.”

Carry Appeal

Emerging-market assets got a fresh lift on Thursday from the Fed’s surprise forecast for no rate increases in 2019. Russia’s currency and bond markets have led a rebound in the asset class this year as the softer policy backdrop and stabilizing oil prices returned the ruble’s carry-trade appeal after last year’s slump.

Foreign investors are boosting their holdings of ruble notes and the non-resident share climbed in January after nine months of outflows. The Finance Ministry sold more than $1 billion of local-currency debt on Wednesday, a week after netting its biggest local bond auction on record.

Russia's Eurobond Catches a Wave Hours After Dovish Fed Turn

Yields on Russia’s dollar bonds due in 2047 dropped four basis points to 5.26 percent on Wednesday, the lowest since July. In the event of a successful placement, Russia would join a swelling list of issuers this year that includes Ghana, Benin, Uzbekistan, Egypt, Turkey and Saudi Arabia.

Yuan Plan

After a placement in dollars or euros, Russia may sell bonds on the Moscow Exchange denominated in Chinese yuan, according to a person familiar with the plans, who didn’t provide further details and asked not to be identified because the deal isn’t public. Earlier, Russian officials had said the issuance may total 6 billion yuan ($898 million).

The Kremlin has mulled a yuan-bond sale since U.S. and European sanctions over Ukraine in 2014 locked some of the nation’s biggest companies out of western capital markets. President Vladimir Putin is seeking to cut the nation’s exposure to the greenback and Russia now holds about a quarter of the world’s yuan reserves after a massive shift out of the dollar last year.

--With assistance from Natasha Doff.

To contact the reporter on this story: Olga Voitova in Moscow at ovoitova@bloomberg.net

To contact the editors responsible for this story: Mark Sweetman at msweetman@bloomberg.net, Alex Nicholson, Torrey Clark

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