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Russia: Analysts Say Russian Bond Response 'Phenomenal'

  • Robert Lyle

Washington, 22 November 1996 (RFE/RL) - Russia's first global bond offering sold so well on international markets Thursday that American analysts called the response "phenomenal."

Russia released its first eurobonds in London, New York, Tokyo and other major Western financial capitals and quickly sold the full $1 billion worth. In fact, New York financial sources said the offering was "three times oversubscribed" when the bonds were actually sold Thursday. One source said that "Russia could have increased the size even more -- even to $2 billion -- but chose not to."

The bonds, denominated in dollars, mature in five years and carry an interest rate that is about 3.5 percent above the rate paid by five-year U.S. treasury notes. It is Russia's first move into the global bond market to raise private capital to finance long-term government operations. The bonds were sold only to institutional investors like mutual funds, insurance company portfolios and large investment houses. They were not available to individual investors.

One analyst in New York said the oversubscription "demonstrates the market's acceptance and support of the economic reforms in Russia."

A broker commented privately that the market was "really waiting to see what demand was like" and that this quick buy-out means there is a lot of interest in further offerings from Russia. U.S. experts say there is particular interest in potential bond offerings from the cities of Moscow and St. Petersburg and projected bond issues by Gazprom, Lukoil and the Ministry of Railways.

Analysts, brokers and experts in the U.S. financial markets spoke on the condition they not be named.

Both the size of the offering and its popularity surprised experts in the United States. In a series of presentations to potential investors in New York and other capitals in recent weeks, Russian officials had been talking about trying to sell between $300 to $500 million worth of the bonds. But souces in the industry say it became clear that this was a "pretty exciting issue" so that officials felt they could easily push the total to $1 billion.

Two major western investment firms handled the sale of the bonds -- SBC Warburg and J.P. Morgan. The Morgan firm, based in New York, has become something of an expert in handling global bond sales for countries in transition, having been the underwriter on recent bond offerings by Lithuania, Slovakia, Poland, Slovenia, China, and Turkey.

The Russian bonds carried ratings from three commercial rating agencies of investment level. Analysts point to Russia's low inflation, the successful presidential election and the country's general economic stability as factors in giving the bonds a good rating. "Euromoney" magazine, in its semi-annual country risk rating in September moved Russia up from 100 to 86, just below Latvia and Estonia.

Private and individual investors could not buy the Russian Eurobonds, but they are showing more and more interest in securities available on regular stock and bond markets in the United States.

Robert Salomon, a top official of the New York investment firm STI Management, says Russia's stocks are "cheap" on U.S. exchanges right now because there are "incredible risks associated" with them -- "risks that range from political instability, to (the lack of a) clearing mechanism, to Boris Yeltsin's going in and out of the hospital, to the potential for a reversian to communism."

However, Salomon says, "there is change afoot" in Russia, state enterprises are being privatized, and the country has "more oil, natural gas, coal, silver and diamonds than almost anyone in the world, so this is the time to begin thinking about Russia."

Salomon points to two mutual funds that are now specializing in investing in Russia -- the $100 million Templeton Russia fund and a new fund of about the same size being put together by the Morgan Stanley company. The key for individual Western investors in Russia, says Saloman, is to "get a professional to do the investing," usually within a mutual fund.

But Salomon did not reject two individual Russian stocks that are now available on U.S. markets -- Vimple cellular telephone, the first Russian stock to be sold on the New York Stock Exchange last week, and Lukoil, which is being traded on the so-called Nasdaq market, a smaller exchange that specializes in more speculative type stocks.

Both are selling briskly, he notes, but the prices fluctuate up and down rather quickly so are "not for the weak at heart."

Still, Salomon says American investors, who recognize there are still great risks in investing in Russia, are betting that in the long term the country will succeed. Investors realize that it could go bust, he says, but "it could as well go up three, five, ten fold if these stocks achieve a valuation similar to other places in the world that are more settled."