Russia on Wednesday hailed its Eurobond issue as a triumph over Western obstruction, but there was no sign that big foreign investors had bought the bond and, unusually for a large issue, there was scant trading in the paper once it was placed.
Russia had sold $1.75 billion in 10-year Eurobonds on Tuesday, smaller than its previous placements, after Western officials warned international banks and investors against taking part. The yield of 4.75 percent was some 50-70 basis points above equivalent secondary market yields.
Russia nevertheless put a positive spin on the issue, the first since Western sanctions were imposed on Russia in 2014 in retaliation for its actions in Ukraine. The bond accounts for just over half of Russia's $3 billion foreign borrowing target for the year.
Finance Minister Anton Siluanov said on Wednesday that foreign investors had been given priority and had bought $1.2 billion of the bonds, with the remainder acquired by Russian non-state banks. State-owned banks were excluded.
Andrey Solovyov, global head of debt capital markets at placement organizer VTB Capital, told Reuters the foreign buyers were "high-quality investors, who very often buy Russian sovereigns."
He said they consisted mainly of investment funds and private banks. British investors had bought a third of the issue, he said, with the next largest geographical shares from continental Europe and Asia.
However, market participants said there had been hardly any trading on the secondary market, where it is more usual for up to 25 percent of a large issue to change hands on the first day.
If demand has been strong, buyers who missed out try to get hold of the paper immediately after the placement, and some who did buy sell it on for a quick profit.
"Secondary trading has been minimal... I have yet to trade," said a trader at a Western bank.
Some analysts and investors were skeptical that genuine foreign participation was as large as the Russian figures indicated, as some of the foreign investors may in fact have been Russians investing from abroad.
"I doubt there were significant - beyond a few hundred million dollars - pure Western investors," said Timothy Ash, head of emerging market strategy at Nomura. "Even Asian participation seems to have been muted, again
perhaps reflecting the complicated technicalities and compliance issues related to this deal."
Solovyov acknowledged that investors had needed time to get used to the technicalities of the issue, which unusually was not being handled by either Clearstream or Euroclear, the two largest international settlement banks, adding:
"There were some geopolitical issues as well, so probably it would not have been a good idea to offer all $3 billion at this yield."
Solovyov said the issue might be topped up later, on better terms for the issuer, but Siluanov said there were no plans for a top-up.
Many potential investors contacted by Reuters said they had been deterred by liquidity concerns, given doubts about whether brokers, clearing houses and custodians would handle the bonds.
"All these restrictions would impact the liquidity around the bonds and, in our view, this particular risk, that of liquidity, outweighed the attractive valuations," said Marcelo Assalin, head of emerging debt at NN Investment partners.
He said these issues outweighed direct concerns about sanctions or the bonds' legality. Liquidity was also a factor taken into account for index inclusion, fund managers said.
Kieran Curtis, investment director for emerging market fixed income at Standard Life Investments, said he did not know of any foreign investors who had bought the bonds.
"It might just be that (the foreign buyers) are a quiet bunch, but also there's a lot of Russian money outside Russia," he said. "So if you wanted to say you had sold this overseas, could you class that as overseas investment?"
"It's difficult to say this was a resounding success - Russia has borrowed less than it hoped for."
However, some like Pavel Mamai, portfolio manager at UK hedge fund Promeritum Investment Management, decided to buy.
"We went into the issue with a two-fold logic - first, we do have the ability to settle locally," said Mamai. "Second, we think the bond will start getting settled through Euroclear, and then there will be decent upside."
The issue was much smaller than Russia's previous Eurobond issues in 2012 and 2013, each of which raised $7 billion.
Traders said it had traded on the secondary market on Wednesday at a yield of 4.56 percent.
This was much higher than Russia's 2023 sovereign bond issued in 2013, trading at a bid/ask yield of 3.92/3.86 percent.
Despite putting a positive spin on the issue, Russia was clearly frustrated that many foreign buyers had stayed away.
Russia's VTB Capital was the sole organizer of the placement, and Siluanov said Russia planned to bypass foreign banks for future launches, following what he called "absurd" pressure on Western organizations.
He bemoaned what he called "telephone law" - the practice, more normally associated with Russia, in which government officials apply informal pressure by making their wishes known over the telephone.
"Our papers (bonds) aren't under any sanctions, but all the same there has lately been active use of this kind of telephone law in recommendations to investors," he said.
"You can't talk about free movement of capital... if you don't let your companies and banks earn money. It's absurd."
Siluanov said Russia was continuing to negotiate with Euroclear and other settlement organizations.
"We hope that we will find a solution and will find ways to refrain from attracting international banks in future for issuing our bonds, and use our own issuance infrastructure, both on the internal and external markets," he said.