September 11, 2017 / 1:56 PM / a year ago

INTERVIEW-Russia may scrap Eurobond swap if no deal with bondholders

* Russia plans to swap issues due in 2018, 2028 and 2030

* Big part of one issue held by one investor, price overstated - finmin

* Swap to allow lower burden on state debt

By Darya Korsunskaya, Andrey Ostroukh and Yelena Orekhova

MOSCOW, Sept 11 (Reuters) - Russia wants to ease the burden on its budget by swapping outstanding Eurobonds this year but may scrap the plan if investors don’t accept the ministry’s conditions or bondholders ask for an unrealistic price, a senior finance ministry official said.

The ministry is looking for ways to postpone paying back foreign debt, having announced its plan to swap bonds in 2016. It plans to offer three papers for the swap: Russia-2018 , Russia-2028 and Russia-2030 , all issued before 2010.

Konstantin Vyshkovsky, head of the state debt department at the finance ministry, told Reuters in an interview that the swap plan - under which the ministry plans to issue new paper - could be scrapped if the bond-holders do not agree with the ministry’s offer, or the ministry does not agree with the price investors want.

Russia needs to pay almost $3.5 billion to the holders of Russia-2018, due July 24 next year, another $2.5 billion under the Russia-2028 issue and further $10.7 billion to Russia-2030 holders, according to the ThomsonReuters data.

“The main goal for us is to lower payments over the next three years,” Vyshkovsky said, adding that the finance ministry won’t offer to pay a price above the market one.

Force majeure was also possible, Vyshkovsky said, without elaborating.

While the ministry needs $3.5 billion to redeem the paper maturing in 2018, the overall borrowing plan envisages raising $3 billion on the global market next year. If it swaps the 2018 Eurobond, Russia won’t need to look for extra funds to repay debt, Vyshkovsky said.

Vyshkovsky, who previously said a swap would require relatively calm market conditions, declined to reveal the details of the new Eurobonds that the ministry is planning to replace the existing ones with.

But he said that in theory, the ministry would like to have a paper with a seven-year maturity to establish more flexible pricing. The bulk of the ministry’s external debt is in dollars. The ministry also has an outstanding Eurobond in euros maturing in 2020 and which is not planned to be swapped.

If the finance ministry sells new Eurobonds, it would be the second time this year it has tapped global capital markets despite Western sanctions imposed on Moscow for annexing Crimea and its role in the Ukrainian crisis.

The finance ministry sold two Eurobond tranches in June, raising $3 billion with the demand topping $6.6 billion, in a deal that Russia painted as a victory over restrictive geopolitics.

Western sanctions, Vyshkovsky said, do not directly target the swap option “so in this regard, nothing was changed.”


At least one of the Eurobonds planned for the swap has a distorted and artificially inflated market price as a large chunk of it is held by one investor, Vyshkovsky said.

He declined to comment when asked if he meant Russia-30 bonds held by Otkritie Bank, one of Russia’s largest private lenders recently rescued by the central bank.

“The price is being distorted at at least one paper as a large part of it is being held in one’s investor’s portfolio... In other words, so called market price of this paper is overstated,” Vyshkovsky said.

“The swap price for this paper would not match the market price... We can’t take the price we see on the monitors... as its clear that it’s not transparent and fair.. We need to establish a fair price.”

This fact, he said, is complicating the swap process. In theory, Vyshkovsky said, if the paper is not liquid, the bondholders may agree to sell the paper more cheaply.

In general, the finance ministry is aiming to sell as much of the new Eurobonds as possible to ‘qualitative’ foreign investors to diversify the base and get investors such as large western pension funds.

The finance ministry is ready to meet the needs of large foreign investors by offering the desired types and maturities of Eurobonds but the ministry won’t tap the global capital market at any price, Vyshkovsky said.

“Foreign currency borrowing is needed only to support Russia’s presence on external markets, at best.”

He added that the finance ministry may increase the domestic borrowing plan this year by offering the market additional 100 billion roubles ($1.75 billion) in OFZ treasury bonds. ($1 = 57.1500 roubles) (Writing by Andrey Ostroukh; Editing by Katya Golubkova and Toby Chopra)

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