President Vladimir Putin took a bold step yesterday (Thursday) by making plain to Russia's creditors that the government wants to repay all its outstanding Paris Club debt this year.
That would include the Soviet-era debt it owes to Germany, which securitised the debt in July 2004 with a Eu5.5bn Eurobond credit-linked to the Russian obligation.
Deutsche Bank and Goldman Sachs arranged the deal through special purpose vehicle Aries Vermögensverwaltungs GmbH.
Russia has already proposed to the club of 19 creditor countries that it aims to repay $12bn this year of the $25.2bn it owes. It said it would start negotiations with the creditor countries in mid-May.
President Putin, who was holding talks with German chancellor Angela Merkel in the Siberian city of Tomsk, said he hoped Germany and other creditors would accept the proposal.
However, his remarks required clarification by finance minster Alexei Kudrin.
"Earlier it was proposed that we would repay all of our borrowing, with the exclusion of Aries," Kudrin was reported to have said. "But we are making our creditors aware that Russia would like to redeem everything, including the securities issued by Germany linked to Russian debt."
Aries' $2.44bn 2014 bond, with a coupon of 9.6%, rallied to 124.00 bid yesterday, yielding 5.942% at the close.
"Russia's intentions to prepay the entirety of its Soviet-era Paris Club debt prompted a rally in German Aries debt — somewhat exaggerated in our view," said JP Morgan's emerging markets research team in a note.
The Eu1bn 7.75% 2009 bond issued by Aries yields 4.12%, and the Eu2bn Aries FRN, priced at 325bp over Libor, yields 2.95%.
Kudrin said Russia owed Germany $9.5bn and that Peer Steinbrück, his German counterpart, and the German cabinet would consider the proposal before meeting Russian officials again later this year.
Russia used windfall oil revenue in its stabilisation fund to pay back $15bn of Paris Club debt last August.
The fund, established in 2004, has grown to around $62bn this year and has been the central instrument in the government's debt repayment plan.