Ruble Bond Market Expanding as Belarus Prepares First Sale: Russia Credit

By Maria Levitov

Belarus will become the first country outside Russia to sell bonds denominated in rubles as the government seeks to attract investors from its biggest trading partner and borrow at cheaper rates than in U.S. dollars.

The former Soviet state plans to offer as much as 15 billion rubles ($489 million) of securities this month, according to OAO Sberbank, Russia's biggest lender. Borrowing in rubles may save Belarus about 2.5 percentage points in annual interest compared with debt in dollars, said Nikolay Podguzov, the head of fixed-income strategy at VTB Capital in Moscow.

"This is a trailblazer," said Alexander Morozov, chief economist for Russia and the former Soviet Union at HSBC Holdings Plc in Moscow. "For Belarus, it's a good way to diversify. Expecting emerging-market currencies to outperform, investors are becoming increasingly interested in local bonds."

Borrowing costs in rubles are tumbling after investors poured a record $41 billion into emerging-market bonds this year, according to data from EPFR Global, a research firm based in Cambridge, Massachusetts. Emerging-market bonds denominated in local currencies climbed an annual 19 percent on Oct. 28, JPMorgan Chase & Co.'s GBI-EM Global Diversified Index shows.

Russian President Dmitry Medvedev is promoting the ruble as an international reserve currency, just as Brazil is trying to stem inflows to prevent further strengthening of the real.

"We use the ruble in common trade, so it's a logical step for us," Belarusian Finance Minister Andrei Kharkovets said in an Oct. 15 interview in Moscow. Belarus will open Russia's ruble debt market for other sovereigns so "this debut issue is of interest for us and for the Russians," he said.

Junk Status

Belarus, which last year turned to Russia and the International Monetary Fund to help rescue its economy, sold its first foreign bonds in July to finance the budget. The 8.75 percent, dollar-denominated five-year bonds gained, pushing the yield to a low of 7.716 percent on Sept. 13. They yielded 7.830 percent yesterday, down from a high of 8.731 percent on Aug. 26.

The yield on Belarus's dollar bonds is 653 basis points over benchmark swap rates, according to prices compiled by Bloomberg. The difference compares with a spread of 380 basis points over Russia's benchmark non-deliverable forwards for bonds with the same ratings and maturity in rubles sold by OAO Mechel. The comparison shows the yield on ruble bonds may be about 250 basis points lower for Belarus than if the government sold dollar-denominated notes, VTB's Podguzov said by telephone on Oct. 27.

Belarus and Moscow-based Mechel are both rated B+ by Standard & Poor's and B1 by Moody's Investors Service, four levels below investment grade.

'External Enemy'

While political relations have been strained, Belarus derives about half of its trade from Russia. President Alexander Lukashenko said last month his relationship with Moscow "leaves much to be desired." In June last year, Russia banned the import of Belarusian dairy products.

Lukashenko, 56, is building his campaign for re-election next month on promoting the image of Russia as an "external enemy," Russian President Dmitry Medvedev, 45, said on Oct. 3. Relations with Russia have "hit a dead-end," Medvedev's spokeswoman, Natalya Timakova, said a day later.

"Everyone is afraid of political risk," Sergey Dergachev, who helps manage $6 billion of emerging-market debt at Union Investments in Frankfurt and holds Belarusian dollar bonds, said on Oct. 27. "What is holding many back from investing is the lack of clarity with the political situation."

Ukrainian Trade

Russia accounted for 48 percent of total Belarusian trade last year, according to the Russian Economy Ministry. The two countries formed a customs union with Kazakhstan this year, which they plan to expand into a common economic space by 2012.

Ukraine, another former Soviet republic, discussed selling Russian ruble bonds as relations between the countries improved after the election of President Viktor Yanukovych in February.

"It would make sense for us to borrow in rubles," if Russia agrees to use rubles and hryvnia in trade, Prime Minister Mykola Azarov said in an interview on Sept. 3. The two countries are considering switching to ruble payments, Ukrainian Finance Minister Fedir Yaroshenko told reporters in Kiev on Oct. 27.

Besides Belarus and Ukraine, Armenia and Tajikistan may also consider issuing bonds in rubles, HSBC's Morozov said.

"We see that the ruble is strengthening its position as a currency," Russian Deputy Finance Minister Dmitry Pankin said in an interview in Kiev, the Ukrainian capital, on Oct. 27. "Belarus will issue ruble bonds on the Russian market. This means that the ruble is really gaining an international status. We think this process will continue."

Ruble, Bonds

The ruble was unchanged at 30.7750 per dollar yesterday, its strongest level since Oct. 28. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge, show the ruble at 31.0346 per dollar in three months.

The yield on Russia's dollar bonds due in 2020 fell 10 basis points, or 0.10 percentage point, to 4.323 percent, the lowest since Oct. 21. The price of country's ruble notes due August 2016 was little changed, leaving the yield unchanged at 7.28 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell half a basis point to 141.5 yesterday, down from this year's peak of 217 points, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a debtor fail to adhere to its agreements.

Credit-default swaps for Russia, rated Baa1 by Moody's Investors Service, its third-lowest investment grade rating, cost 12 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.

Narrower Spread

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 3 basis points to 203 points, according to JPMorgan EMBI+ indexes. The difference compares with 122 for debt of similarly rated Mexico and 172 for Brazil, which is rated two steps lower at Baa3 by Moody's.

The yield spread on Russian bonds is 34 basis points below the average for emerging markets, near the smaller difference since September 2009 and down from a 15-month high of 105 in February, according to JPMorgan Indexes.

For Belarus, a premium of about 3 percentage points to the country's Eurobond means "the sale can be a success," Dmitry Dudkin, head of fixed income research in Moscow at UralSib Financial Corp., said by telephone on Oct. 26.

The Belarusian ruble is correlated with the Russian ruble, making borrowing in the currency less risky, according to Anastasia Golovach, a Renaissance Capital analyst in Kiev.

Currency Basket

Belarus's currency is pegged to a basket comprising the Russian ruble, the dollar and the euro in equal proportions, with scope for fluctuation within a 10 percent band around central parity, Golovach said in an e-mail.

Belarus also may sell as much as $1 billion of Eurobonds in through 2011, Pavel Ladik, an aide to the finance minister, said by telephone from Minsk on Oct. 26. He declined to comment on the maturity or provide further details of the ruble bonds.

Political tension between Russia and Belarus won't derail the sale, Dmitry Peskov, Russian Prime Minister Vladimir Putin's spokesman, said by telephone on Oct. 27.

"You shouldn't confuse economics and politics," he said.

To contact the reporter on this story: Maria Levitov in Moscow at

To contact the editor responsible for this story: Gavin Serkin at


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