Putin's Hometown Challenges Moscow on First Bond Since 2005

St. Petersburg sold debt for the first time since 2005, with a yield close to Moscow, the capital city that sets the benchmark for municipal borrowing costs in Russia.

the second largest city sold 1.7 million rubles (53.6 million dollars), or 44 percent of 3 billion rubles for five-year bonds offered a yield of 7.91 percent according to a statement released by the finance committee of the city today. The municipality plans to issue up to 25 billion rubles next year to help finance spending, Eduard Batanov, the head of the finance committee of St. Petersburg, said in a telephone interview. The yield on the bonds due in Moscow in June 2015 rose 43 basis points this month to 7.65 percent today.

St. Petersburg, the hometown of President Dmitry Medvedev and Prime Minister Vladimir Putin is coming to market as the government of Russia and Belarus are more reluctant to offer bonds in rubles because of a decline in the currency. The ruble is the second worst performer among 25 emerging-market currencies tracked by reporters so far this half, appreciating 0.3 percent against the dollar compared with a gain of 5 percent for the Brazilian real.

"Historically, we have to offer higher yields, but during the years of our absence from the market of our credit quality has not deteriorated, our debt has been steady," said Batanov on 23 November.

The Finance Ministry has reduced some sales of federal government bonds, known as OFZs, and OAO Gazprombank told clients this week that he expects the government may delay its first offering of debt denominated in rubles abroad. Belarus, which had planned to become the first foreign country to sell bonds denominated in the Russian currency has postponed the sale of two-year degrees "indefinitely" yesterday.

Size Premium

Ruble weakness and falling markets in Europe and Ireland is looking for a bailout will hurt all borrowers in local currency in Russia, including St. Petersburg, which may have to offer a higher premium to Moscow, said Konstantin Kostrub, the head of fixed-income trading at ING Groep NV in Moscow.

St. Petersburg is ranked Baa2 by Moody's Investors Service, one level below the Russian state, and BBB by Fitch Ratings and Standard & Poor's, the same level as the sovereign. Moscow is Russia the same level in all three rating companies.

"Their credit quality is high enough, but you may need to offer a premium of 150 basis points for a successful placement," said Kostrub by email yesterday.

Analysts at Bank of Moscow and TKB Capital, an investment bank, say they hope that St. Petersburg will have to pay a premium for little or no control over Moscow's bonds because the smaller city has strong finances.

Moscow last debt sold on October 28, when it issued 8.6 billion rubles of municipal bonds in September 2013, with a yield of 6.65 percent. The yield was 6.7 percent today.

"The shortage of supply '

"The municipal debt offers a value play well on the OFZ, are relatively liquid," said Sergio Dergachev, who helps manage the equivalent of $ 8.5 billion of debt, including corporate bonds in Russia in the Union Privatfonds Investment in Frankfurt. "Debt Muni offers scarcity value, and regions which do not reach the markets that often."

The extra yield investors demand to hold the Russian government debt rather than U.S. Treasuries fell 2 basis points to 218 today, according to JPMorgan Chase & Co. 's EMBI index. The yield spread compares with 140 basis points for similar debt-rated 176 points for Mexico and Brazil, two steps that is rated below Baa3 by Moody's.

The yield of Russian bonds is 27 basis points below the average for emerging markets, down from a maximum of 15 months from 105 in February, according to JPMorgan indexes.

Default Swaps

The cost of protecting Russian debt against default by five years using credit-default swaps gained 3 basis points to 141.5 on Nov. 24, according to data provider CMA. Swaps credit-default pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to its debt agreements.

Russia's credit default swaps is 15 basis points more expensive than contracts in Turkey, classified as four levels below Ba2 by Moody's. Turkey was 40 over Russia on 20 April.

The yield on the federal ruble bonds due 2016 fell 6 basis points, or 0.06 percent, to 7.37 percent. Government bonds in dollars per 2,020 won, lowering the yield on three basis points to 4.823 percent.

The ruble added 0.2 percent to 31.2 per dollar today. non-deliverable, or opinions that provide guidance to the expectations of currency movements, allowing foreign investors and companies to fix the exchange rate at a specific level in the future, show speed ruble 31.4420 per dollar in three months.

Change Capital

The city of 4.6 million people was the imperial capital of Russia after it was founded by Tsar Peter the Great in the 18th century. The Bolsheviks moved the capital to Moscow in 1918 after taking power last year.

St. Petersburg is less than 50 billion rubles of debt outstanding after the repurchase of a previous batch of bonds in the past five years, the Bank of Moscow, said in a report of 22 November. Moscow's debt amounted to 278.8 billion rubles on October 1, also including loans and bonds denominated in foreign currency, according to the committee on the public debt of the city government of Moscow.

Moscow, Russia's largest municipal lender, represented about 87 percent of bonds issued by regional governments this year.

St. Petersburg bonds can become "new blue chips" in the market, according to the Bank of Moscow. St. Petersburg has "stronger budgetary parameters" in Moscow and do not plan a substantial increase in debt, TKB Moscow-based capital, said on 22 November.

"From the standpoint of credit quality, we see a difference between St. Petersburg and Moscow and rate them on the same level," said Boris Kopeykin, S & P analyst in Moscow, in a telephone interview in November 23. "What sets St. Petersburg, Moscow also is the almost total absence of debt."