After shunning bond auctions for nine weeks amid the worstquarter for ruble debt since 2011, Russia indicated it's preparedto borrow at more than 9 percent for the first time in almost fiveyears.

In its first auction since July 16, the Finance Ministry soldall 10 billion rubles (US$262 million) of August 2023 notes onoffer to a single bidder on Sept. 24 at an average yield of 9.37percent. Current yields are “acceptable” and the finance ministryplans to fulfill this year's bond sale plan, it said in an e-mailedresponse to questions on Sept. 26.

“The auction results and the ministry's statement essentiallysay that it's now prepared to pay more than 9 percent,” RomanDzugaev, a fixed-income trader at OAO BFA Bank in St.Petersburg,said by e-mail the same day. “That means there will be more supplycoming, though not necessarily with demand like we saw at thissale.”

With the government budget surplus running at $23 billion in thefirst eight months of 2014, Russia refrained from borrowing becauseof the political premium in the market, where a large supply of newbonds could send borrowing costs still higher, Finance MinisterAnton Siluanov said on Sept. 11. Yields surged in the third quarteras President Vladimir Putin's standoff with Europe and the U.S.over Ukraine sparked escalating sanctions and a market selloff.

The ministry last week accepted a yield of more than 9 percentfor similar maturity ruble bonds for the first time since October2009, according to data compiled by Bloomberg. The yield on the2023 notes was 9.37 percent at 2:49 p.m. in Moscow, compared with8.38 percent at the end of June.

“The debt market has reached some equilibrium, and we regardcurrent yields as acceptable given the central bank's key rate,”the Finance Ministry's press service said on Sept. 26. “At the sametime, we still have an opportunity not to borrow in the market atany price.”

Russian government bonds lost 12 percent in the third quarter indollar terms, their worst performance since 2011, according to Bankof America Merrill Lynch data.

The ministry aims to sell a further 223 billion rubles of bondsthis year, it said. It has raised 134 billion rubles fromlocal-currency bonds this year and placed 100 billion rubles ofuntradable GSO bonds with the State Pension Fund. This compareswith 821 billion rubles borrowed in 2013.

Cutting 'Slack'

While the ruble is sliding to record lows against the dollar,it's boosting the budget balance of the Russian government, whichgets half of its income from oil and gas. The currency has weakened17 percent against the dollar this year, the biggest drop inemerging markets after the Argentinian peso. It dropped 0.8 percentto 39.4935 per dollar today.

“Given that the budget is still in a surplus, the FinanceMinistry can give itself some slack,” Vladimir Osakovskiy, chiefeconomist at Bank of America Merrill Lynch said by phone fromMoscow on Sept. 26. “There will be sporadic placements goingforward with low volumes offered.”

The yield on the 2023 bonds fell 38 basis points this month assigns a Sept. 5 truce between the Ukrainian government in Kiev andpro-Russian separatists is holding, fueling speculation thatsanctions won't be expanded.

With 13 trading weeks left this year, Russia must sell 17billion rubles of debt per week to meet the ministry's target, anamount it hasn't sold since Feb. 12, before it annexed Crimea andthe U.S. and European Union first imposed sanctions.

“The Finance Ministry will now be offering bonds every week, ina technical auction with a limited number of buyers, like lastweek, unless the yields exceed 9.5 percent,” Konstantin Artemov, amoney manager at Raiffeisen Capital asset management in Moscow,said in e-mailed comments on Sept. 24.

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