GMHLY Gam Holding Ag (PK)

Russia on Monday was placing its first Eurobond since Western sanctions were imposed two years ago, pressing ahead with the issue despite Western banks not taking part.

The Russian Finance Ministry said VTB Capital, a unit of state-owned lender VTB, was the sole organizer of the dollar-denominated placement, after Moscow struggled to attract major global banks to help sell $3 billion in bonds, as banks were unwilling to upset U.S. and European authorities that placed sanctions on Russian companies and individuals over the Kremlin's interventions in Ukraine.

Investors said demand from abroad would be limited by the absence of a major Western bank and the fact that the settlement of the bond will be carried out in Russia, rather than by the two main settlement agencies.

"They're definitely reducing the size of the investor base by their inability to use a Western bank," said Paul McNamara, an investment director at GAM Holding AG.

"The deal will be done—the question is foreign participation. What the Russians would like to do is open up a channel to access international capital markets. As things stand, I'm not sure there's going to be much foreign participation" because of the settlement issue, Mr. McNamara said.

A deal notice released to investors Monday showed that Russia is selling a 10-year Eurobond, guiding investors to a yield of 4.65%-4.9%. It gave no indication of the planned size of the placement, but the government's borrowing plan for this year sees foreign borrowing at $3 billion. The deal notice said the proceeds would be used for general government purposes and wouldn't be used to violate U.S. and EU sanctions

Demand for the issue stood at around $5.5 billion by late afternoon, according to a person familiar with the matter. The placement was expected to be completed Tuesday, allowing Asian investors the chance to participate, the person said.

Moscow-based analysts for Dutch lender ING said the placement was a surprise, noting that there was no premarketing or roadshow for the bond.

For the Russian government, the Eurobond deal would help it plug holes in a budget damaged by the fall in price for crude oil, its main export. By borrowing abroad, Russia would be able to delay unpopular measures such as increasing income taxes and cutting pension payouts as the country's rainy day fund is running out.

Given that the settlement of the Eurobond is set to be carried out domestically, via the National Settlement Depository, it is possible that a Russian state-owned bank would use its excess foreign-currency cash to buy the new bond and help the finance ministry to fill gaps in the oil-battered budget, ING said.

The likely lack of foreign interest would indicate that Moscow's access to global financial markets is still significantly curtailed.

Western investors said there were two potential obstacles to buying the bonds.

First, asset managers' compliance departments would have to sign off on buying bonds underwritten by VTB Capital, the investment arm of state-controlled VTB Group, which is subject to international sanctions.

Second, some investors said they wanted clarification that a Western settlement firm such as Clearstream or Euroclear would agree to settle the bonds.

VTB Capital has told investors it expects a statement on the bonds from Euroclear and Clearstream by the end of Monday, according to Yerlan Syzdykov, a portfolio manager at Pioneer Investments.

Euroclear and Clearstream declined to comment.

"The market is still confused" about the settlement issue and the sanctions test, said Mr. Syzdykov.

Once these issues have been resolved, "the market will decide whether to go ahead or not" with the bond deal, he said.

Mr. Syzdykov said the assurance from VTB Capital that the proceeds wouldn't be used to prop up sanctioned entities would be sufficient enough for his firm to buy the bonds. "It wouldn't preclude us from participating," he said, adding that he thought the bonds looked cheap.

Mr. Syzdykov said that whether to invest in the bonds depends on what investors believe will happen to oil prices.

"It is naturally an oil-related investment for us. Our belief is that oil by the end of the year will get to $56 a barrel. If that's the case, we still have a bit of an upside in Russia," he said.

Write to Andrey Ostroukh at andrey.ostroukh@wsj.com and Christopher Whittall at christopher.whittall@wsj.com

(END) Dow Jones Newswires

May 23, 2016 21:15 ET (01:15 GMT)

Grafico Azioni Gam (PK) (USOTC:GMHLY)
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Grafico Azioni Gam (PK) (USOTC:GMHLY)
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