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Sanctions could kick-start Russian bond market

Russia factory industry smoke chimney from Adobe 230x150
By Lewis McLellan
20 Aug 2019

Sanctions on a country’s sovereign debt do not typically herald a windfall of fee-earning bond market business in that country, but Russia may prove an exception. If the sovereign distorts prices in the domestic market, Russian corporates and banks may look to the international market to borrow instead.

International banks haven’t had a look-in on a sovereign deal since 2013, so the US’s new sanctions on Russian sovereign paper won’t change anything there.

However, what will change is the Russian sovereign’s footprint in the domestic market. Without being able to tap international money, Russia will have to rely on domestic investors.

That is a deep pool of investors, and Russia’s funding needs are not enormous, but there will still be a significant knock-on effect. Russia has printed $5.5bn on the international market this year, $4bn in 2018 and $7bn in 2017.

Adding those sorts of figures to the sovereign’s domestic borrowing tally will soak up a sizeable wodge of liquidity, which would otherwise be ploughed into paper from Russia’s corporates and banks.

Estimates differ on how big an impact this will have on the Russian private sector’s domestic funding costs, but some issuers have modelled an increase of up to 100bp.

If the Russian sovereign weighs into the domestic market, the price distortion at home could make the pricing available in the international market look more attractive.

International investors are unlikely to baulk at Russian credits. The latest sanctions seemed deliberately toothless, and some believe that these have set the standard for the tone of US’s actions against Russia. With rates plumbing ever lower, the yield on offer from well-run Russian companies with low leverage will appeal to investors.

DCM bankers would do well to get back in touch with Russian borrowers. Some might well be looking for an opportunity to come to market soon.

By Lewis McLellan
20 Aug 2019