Last week, Russia’s Vice Premier and Finance Minister Aleksei Kudrin stated that the Russian government and banks are ready to support Ukraine and Belarus if they issue government bonds in rubles and place them on the Russian stock exchange
Ukrainian analysts consider this project utopian, seeing as the Ukrainian government will have to pay three times the interest rate on loans in rubles and lose money converting the ruble into hard currency. It cannot be ruled out, however, that the Ukrainian government agree to this for the sake of strengthening friendship with the KremlinKudrin says that plans of the Ukrainian government to issue bonds in rubles are in full swing. “I know about these plans, preparatory works are underway and the situation is being closely monitored,” he stated.
From the technical point of view, such a step should not create any problems, given that the law on access of foreign issuers of bond on Russian stock exchanges was rubberstamped by Russian President Dmitri Medvedev in April 2009.
The expansion of trading of hard currency and foreign securities was the first step towards establishing the International Financial Center in Russia. The main objective of the Kremlin, which the Russian government has been intensively working on over the past five years, is making the ruble a world currency.
However, the practical realization of such a plan may be riddled with a number of difficulties for both countries. One of them is a very narrow circle of potential investors that may show interest in the Ukraine’s liabilities in rubles. After all, there may not be any bidders interested in Ukraine’s government bonds in Russia or other countries.
“We do not see interest on the Russian market in potential ruble bonds in Ukraine. Although, there is a possibility that Russian state-owned banks will buy the securities within the framework of agreements concerning Russian-Ukrainian cooperation on the inter-government level,” said an analyst of the Debt Instruments Market of the Troika Dialog Ukraine investment company Maria Repko in a conversation with “k:”. In addition to that, it is quite unlikely that Russian investors will be able to loan Ukraine a considerable amount of money.
Foreigners are unlikely to hold on to a majority of ruble bonds due to high currency risks of such bonds. The issuing of bonds in rubles heralds rather dubious dividends for Ukraine. First of all, profit margins from such securities will be much higher than those from Eurobonds.
At the moment, the cost of Ukraine’s sovereign dollar debt ranges 7-9%, depending on the term. At the same time, according to expert assessments, the cost of ruble borrowings could reach 10-12%. “Furthermore, Ukraine will have to take a risk on the ruble, something it does not need at all. After all, unlike a year ago there are currently no problems with attracting funds,” Financial Analyst at Astrum Investment Management Serhiy Fursa underscored. He believes there is no sense in risking and overpaying on debts seeing as the Ukrainian government is about to receive large loans from international creditors (IMF, World Bank, European Union, etc.).
Secondly, Ukrainian officials will have to really scratch their heads in order to efficiently use the rubles loaned by Russia. “These resources could be used as a part of the currency reserve converted into hryvnia for financing the current needs and used to control fluctuations in the hryvnia to ruble exchange rate,” says Director of Investment Banking Division of Sokrat Bank Volodymyr Klymenko.
“However, the most effective variant is using ruble loans by companies that perform foreign economic activity with Russian partners,” said Director of the Financial Markets Analytical Department of ING Bank Ukraine Oleksandr Pecherytsyn. For example, this money could be used to pay for Russian gas and avoid regular shocks on the currency market, when Naftogas Ukrainy buys dollars to settle its debts to Russia.
Experts feel this variant is unrealistic. “Payments in most state contracts, gas supply included, are more often than not set in dollars. Given this, it makes no sense to change the terms of payment as Ukraine does not receive proceeds in Russian rubles on a constant basis. Precisely for this reason, the ruble will have eventually be converted into dollars. And still, notwithstanding that national debt in rubles is rather dubious from economic vantage point, Ukraine’s government may make such a decision. Moreover, Premier Mykola Azarov has always been in favor of active use of the Russian currency. In particular, back in 2007 when he served in the post of vice premier Azarov actively promoted the idea of forming part of the gold reserves of the National Bank of Ukraine in Russian rubles. “We will sooner or later face the fact that settlements with Russia will be effectuated in rubles. This does not scare us off. If Russia converts settlements into rubles, we will build up a reserve of rubles,” Azarov said. The issuance of internal currency bonds (T-bills) may be the first step in realizing such plans.
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