DID RUSSIA PAY TOO MUCH FOR ITS SECOND EUROBOND?

Russia’s second Eurobond issue, which was floated in mid-March, had yielded some DM 2 billion in receipts by March 26, First Deputy Finance Minister Andrei Vavilov said on March 26. (Interfax, March 26) However, Nicolas Hagerty, director of the Dutch ABN Amro Bank’s Corporate Finance Division, told participants at a conference on "attracting investment for Russian enterprises" held that same day that foreign investors would have been willing to purchase these bonds at annual interest rates less than the 9 percent offered on the Russian securities. Hagerty emphasized that growing investor interest in Russian bonds, including those issued by regional governments and firms, should help to lower the interest rates on new federal issues.

Hagerty’s comments underscore the paradoxical nature of international investors’ interest in Russian debt. Although the federal government has for all intents and purposes partially defaulted on the "old" foreign-debt obligations inherited from the USSR, foreign investors continue to view Russia’s "new" debt in a different light. This attitude would be understandable if the government were investing bond sale proceeds in improving Russia’s economic competitiveness. However, the revenues produced by the second issue are earmarked to pay off the federal government’s wage and pensions arrears, and can not therefore finance Russia’s economic modernization. Moreover, the government’s ability to raise capital via Eurobond issues allows Russia to slip the noose of IMF conditionality, which weakens the government’s incentives to pursue the prudent economic policies generally demanded by foreign investors.

In large measure, the popularity of Russian debt can be explained by the rapid growth of investor interest in emerging markets in general. According to a recent World Bank study, private investment in emerging markets grew by 33 percent in 1996, and a similar increase may be in store for 1997. Whether Russia will be able to tap this capital remains to be seen, however — especially if it has to continue to borrow at 9 percent.

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