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Sovereign debt: Russia resets sovereign risk perceptions

Bond return shows just how much things have changed since Russia’s default in 1998.

In the end not even the eruption of a volcano in Iceland could deter Russia’s return to the international capital markets after more than a decade. On April 21, the sovereign raised $5.5 billion through a dual-tranche offering with five-year and 10-year maturities.

The deal achieved the government’s aims of repricing the sovereign curve and establishing a liquid benchmark that it hopes will pave the way for issuance from quasi-sovereigns and corporates.

The transaction was the government’s first Eurobond since it defaulted on $40 billion of domestic debt in August 1998. Russia’s comeback had been eagerly expected for several years so it was no surprise that it was able to raise a large amount. What did stand out, however, was the pricing. The five-year tranche was issued at an incredibly tight spread of 125 basis points over US treasuries, while the 10-year came out at 135bp over – this for a transaction rated BBB.

Perhaps that’s a mark of just how frothy the bond markets have become. Certainly some investors thought the Russian government and its lead managers – Barclays Capital, Citi, Credit Suisse and VTB Capital – were too aggressive, as the bonds sank in the secondary market, although the deal probably also suffered because of renewed fears over sovereign debt generally and Greece in particular.

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