* Government says foreigners bought bulk of bond
* Minister: this shows appetite for Russian assets
* Sanctions uncertainty put off some big players (Adds finance minister’s statement, analysts’ quotes)
By Lidia Kelly, Oksana Kobzeva and Kira Zavyalova
MOSCOW, May 24 (Reuters) - Russia raised $1.75 billion on Tuesday in a Eurobond issue with foreigners the biggest buyers, a placement officials said showed there was international appetite for Russian assets despite Western efforts to scare off investors.
But market sources told Reuters the major financial institutions that dominate Western debt markets sat out the placement, while some in the market said the amount raised suggested demand had been modest, even among Russian buyers.
Russia’s finance ministry had not given an explicit target for the amount it wanted from the placement, the first since Western financial sanctions were imposed on Moscow in 2014 over its role in the Ukraine conflict.
However, the government has previously said it sought to raise up to $3 billion in foreign currency debt this year, significantly more than the amount raised on Tuesday.
“The issue was substantially smaller than expected,” said Neil Shearing, chief emerging markets economist at Capital Economics in New York.
“But the fact that around three-quarters of the placement appears to have been taken up by international investors means that the government can just about badge this up as a success.”
The issue, the first in three years, will help the government, battered by a slowdown and the sanctions, to fill gaps in the budget.
But the Eurobond was also an important symbolic test of whether Russia, despite its standoff with the West over Ukraine, could still successfully tap Western debt markets.
The U.S. government and the European Commission had warned investors of the risks of dealing with Russia while sanctions remain in force. Banking industry sources said that was a thinly-veiled warning to stay away from the placement or face negative consequences.
“More than 70 percent of the issue went to foreign investors. It was indeed the group we were aiming at,” Finance Minister Anton Siluanov said in a statement.
“Despite attempts to deprive foreign investors of the opportunity to invest in profitable Russian assets, the volume and the quality of applications were at a good level. We are satisfied with the placement,” Siluanov said.
“Despite the informal pressure .... the demand of investors from different regions showed a high level of trust in Russia as an issuer.”
The book was open until Tuesday evening in Moscow, an extension of an earlier deadline from Monday because investors had continued to sign on, a financial source said earlier.
Demand for the issue was over $7 billion. The final yield was set at 4.75 percent, in the middle of an initial range of 4.65-4.90 percent.
Russia last issued a Eurobond in 2013, a hiatus due in large part to the sanctions. They do not explicitly forbid anyone from handling Russian sovereign debt, but create added uncertainties and risks for investors.
Big Western and Chinese banks were invited by Russia’s government to organise the offer but none signed up, discouraging some other major players from getting involved.
The sole organiser was VTB Capital, a unit of state-owned Russian lender VTB which is subject to sanctions. The big settlement agencies, which usually act as guarantors in bond transactions, did not take part.
Barclays Bank said it would not include the Eurobond in its index, making the bonds less attractive for some big fund managers who use the index as a benchmark for their portfolios.
Those factors made some big Western investors wary, despite the attractive terms on offer for the bond.
“At the moment we are abstaining because of the lack of clarity around the liquidity, and compliance is making us careful,” said Rob Drijkoningen, global co-head of emerging markets debt at Neuberger Berman.
The identity of the investors who bought the Eurobond has not yet been disclosed, so it was not possible to independently verify the government’s assertion about foreigners buying the bulk of the bond.
Russian banks have foreign subsidiaries that could have bid for the bonds, creating an illusion of strong overseas demand.
“Feedback I saw was that most Western investors ... did not participate and stayed on the sidelines,” said Timothy Ash, head of emerging markets strategy at Nomura. (Additional reporting by Katya Golubkova, Alex Winning and Kira Zavyalova in MOSCOW; Writing by Katya Golubkov and Lidia Kelly; Editing by Christian Lowe and Gareth Jones)