Investors Come Flooding Back to Russian Bonds in Spite of Sanctions

In May Russia issued $1.75 billion in Eurobonds on the Moscow Exchange, its first foreign bond issue since 2013. The bonds had a maturity period of ten years and an annual yield of 4.75 percent.

On Thursday a second batch of Eurobonds were issued, worth $1.25 billion with a lower yield of 3.99 percent. The yield on the May 2026 bonds has fallen by almost one percent since their sale.

The lower yield on Russian sovereign bonds is evidence of higher demand from investors, for whom emerging market investments are becoming increasingly attractive amid low yields on Western sovereign debt; an estimated 30 percent of global government debt is currently offering yields of less than zero.

Earlier this week, BlackRock, one of the world's leading asset management firms, warned investors that long-term US sovereign bonds are a poor investment bet at the moment. Just a 0.2 percent increase in Treasury yields could wipe out a whole year's worth of yield income.

​On Friday German newspaper Die Welt commented that Russia's second bond issue came at a good time for foreign investors. More than half the investors (53 percent) were from the US, followed by Europe (43 percent) and Asia (4 percent).

"The state has a lot of scope for new debt, as the national debt is less than 15 percent of GDP – a value that Western countries can only dream of," Die Welt wrote.

"One of the merits of Vladimir Putin is that in the first years of his presidency – the time of the commodity boom – he began to repay foreign debts."

Russia's relatively low debt-to-GDP contrasts with to Western countries such as the US (104.17 percent), Japan (229.20 percent) and Italy (132.70 percent).

Blazej Dankowski, head of Russia and Kazakhstan debt capital markets at Citigroup in London told Austrian newspaper Die Presse that yields on Russian bonds have returned to levels last seen in early 2014.

"Appetite for Russian credit market has reached a level that we have not seen for a long time," Dankowski said.

The $1.75 billion bond sale in May was Russia's first since 2013, when it raised $7 billion on international markets. Demand for the bonds reached $6.3 billion dollars in spite of the lack of clarity over whether the anti-Russian sanctions imposed on some Russian individuals and businesses in 2014 would affect investors' ability to settle the bonds.

However, these fears proved unfounded, and in July Brussels-based Euroclear Bank, one of the two main global providers of settlement and related services for securities, admitted the bonds for settlement.

Euroclear, as well as the Moscow Exchange's National Settlement Depository, agreed to settle the latest bond issue, which was organized by Russia's VTB Capital bank.