Having won the battle of the Eurobond Russia comes back for more

Back in May, at the time when the Russians floated their first Eurobond issue of the year, I said that the Western media, in claiming that the issue was a failure because it raised only $1.75 billion as opposed to the $3 billion the Russians were seeking, was confusing the $1.75 billion of bonds the Russians offered in May with the $3 billion of bonds they had said they might float in the international money markets over the whole course of this year.

I also said that VTB – the bank that managed the sale – was saying the Russians might come back to the market later in the year to raise the balance of $1.25 billion, thereby bringing the total up to $3 billion.  Here is what I said

“If the Russians had indeed offered bonds worth $3 billion for sale but had only been able to sell bonds to a value of $1.7 billion that report would have been true and it would have been right to call the bond sale a failure.  In fact the Russians offered 8,750 10 year bonds each at a price of $200,000 with an annual yield of 4.75% and sold all of them.  The total asking price of the bonds offered for sale was $1.75 billion (8,750x200k) – exactly the amount which was raised from the sale.   

The Financial Times confused the $1.75 billion of bonds the Russians offered in this one issue with the figure of $3 billion of bonds the Russians say they may sell over the course of the whole year.  VTB – the bank that managed the sale – has confirmed there may be more sales of more bonds later this year.  The Russian Finance Ministry however says this will depend on whether the state of Russia’s budget justifies doing it.”

I also said that the attempts by Western governments to prevent Euroclear and Clearview providing the Russian bonds with depository services was illegal, and would eventually fail, and so it proved.

Today what VTB – the Russian bank that is now in charge of placing bonds internationally for the Russian government – said would happen in May, is actually taking place.  The Russians have offered more bonds to the value of $1.25 billion, bringing the total of bonds they have offered this year up to the amount of $3 billion they said they would offer at the start of the year.

Moreover with the question of the provision of depository services by Euroclear and presumably Clearview now resolved in Russia’s favour, there should be no further difficulties with this bond.  Even Timothy Ashe – never an analyst to take an unduly positive view of events concerning Russia – is admitting that “Euroclear’s acceptance should make the latest issue easier”.

As it happens reports are circulating that just a few hours after it was placed the bond had already attracted bids worth $3 billion i.e. it is already more than twice over-subscribed.

As to why the Russians chose to raise $3 billion this year through two offerings of $1.75 billion and $1.25 billion rather than one, the answer as I said in May is almost certainly the inexperience of VTB and its sales team.  Here is what I said about that in May

“Placing a government bond is a massively complex operation.  It is the job of the banks that manage the sale to place the bonds most advantageously on the market.  That requires deep knowledge of the market in order to achieve the most effective outreach to potential buyers.  There are also immense technical challenges in receiving and processing the bids, in deciding amongst them if the issue is oversubscribed, and in transferring the bonds to the buyers.

A small number of Western banks have the necessary expertise to carry out such operations and do so with great efficiency.  By contrast Russian banks like Sberbank and VTB have little such experience since by comparison with Western banks they are relatively small and have far shorter trading histories.

The reason the decision was taken to offer bonds worth only $1.75 billion for sale instead of the full $3 billion talked about was almost certainly VTB’s inexperience in managing such a sale, not worries about a lack of buyers.  The same was almost certainly true of the decision to conduct the sale over 2 days rather than one.  The total bids on the first day apparently came to $5 billion so it cannot have been worries about lack of buyers on the first day that lay behind these decisions.  However limiting the offering to $1.75 billion instead of $3 billion and holding the sale over 2 days rather than one is precisely the sort of step that is sensibly taken in order to reduce the pressure on an inexperienced bank and its sales team so as to avoid mistakes.”

The fact the latest bond was offered with no advance publicity – in sharp contrast to what happened with the previous issue earlier this year – shows that VTB is gaining in experience and confidence.

In summary, the strange story of the Russian Eurobond – or to be more precise of Western efforts to stop Russia floating bonds in the international money markets – has ended with the Russian government showing that it can float such bonds and can raise money in this way.   As a result Western banks have lost a potentially highly profitable part of their business in Russia.  At the same time Russia’s relatively small and underdeveloped financial system has been strengthened.   

Henceforth – as I heard Russian Finance Minister Siluanov confirm in my presence at SPIEF – all future Russian Eurobond issues will be managed exclusively by Russian banks (presumably for the moment that means VTB), and that will remain the case even after sanctions are lifted.