Azernews.Az

By Bloomberg

By offering a little extra insurance, Russia’s Finance Ministry has found a bond traders want to buy.

Sanctions over Ukraine and tumbling oil prices sent the government’s borrowing costs spiraling last year, forcing it to axe 27 weekly debt sales. Last week, investors bid for more than double the floating-rate ruble bonds the ministry offered, helping it post the best auction result in a year.

The floaters, which Russia is reviving after a decade, pay a coupon based on interbank rates from the previous six months. Now that Russia’s central bank has started reversing December’s surprise 650 basis-point interest-rate increase, the notes promise a comparatively high return, according to ING Groep NV.

“Given current expectations of further interest rate cuts, your funding costs may decline, while your coupon rate will be set at the average rate for the past six months, which is a boon,” Dmitry Polevoy, chief economist for Russia and Commonwealth of Independent States at ING in Moscow, said in e- mailed comments on Feb. 12.

The central bank lifted its key rate to 17 percent in December as it sought to quell market panic triggered by collapsing prices for crude, Russia’s main export earner, as well as tension over the conflict in Ukraine. In an unexpected policy turn the next month, Bank of Russia cut the rate 200 basis points, arguing that the shock increase had succeeded in stabilizing inflation expectations and the exchange rate.

Protracted Absence

The bonds are helping the Finance Ministry avoid a protracted absence from the market after repeatedly canceling sales last year as the Ukraine crisis deepened. It’s sold 25 billion rubles ($394 million) of the floating-rate debt due in December 2017 so far this year. That’s five times the amount of fixed-rate debt it’s placed.

The bonds may be of most appeal to lenders, for whom the premium to the inter-bank rate is key, according to Dmitry Postolenko, a money manager at Kapital Asset Management LLC in Moscow.

“It almost guarantees a spread over the central bank’s key rate,” he said. The security isn’t as attractive for investment funds, which “care about absolute return,” he said.

‘Speculative Motive’

After an initial six-month coupon fixed at 10.89 percent, the floaters will pay 74 basis points above the average Ruonia overnight interest rate, according to the Finance Ministry. Ruonia was at 15.24 percent on Feb. 12. The ruble climbed 1.6 percent to 62.47 versus the dollar as of 3:58 p.m. in Moscow.

While the pace of inflation accelerated to 15 percent in January, it’s expected to slow to 12.2 percent by year-end, according to Economy Ministry’s latest macroeconomic forecast.

That means the bond will have a relatively high coupon of about 12.7 percent for the second half of this year, even if Ruonia falls as the central bank reduces interest rates, said Dmitry Dudkin, head of research at UralSib Capital in Moscow.

“This may create a speculative motive” for investors to buy the bonds, Dudkin said by e-mail. “Inflation and, perhaps, interest rates will be notably lower.”