The Parallax Brief


Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

City of Moscow Bond Auction Fails

News emerged this week that a City of Moscow bond auction raised only RUB1.5 bn of the total RUB15 bn offered. For the uninitiated, that’s flirting uncomfortably close to levels where the entire auction would be declared null as a complete failure (usually set at 10%). However, what’s surprising about this news, in my view, isn’t the paucity of investor interest, but that Moscow City managed to sell any at all.

Last week, the world was dealt an arresting reminder of just how cautious investors have become, when a German Sovereign bond auction failed to garner bids for the full amount offered. German bunds are among the safest, most liquid securities in the world, so covering only 87% of the EUR6 bn the German government hoped to raise is a shocking, once-a-decade rarity.

It is clear then, that the investor flight to safety has gone supersonic. When investors eschew even uber-safe securities guaranteed by the Bundesbank, what chance does the City of Moscow have? Certainly, Moscow’s credit image isn’t going to be helped by the revelations that the Moscow Oblast Government (a separate entity not related to Moscow City) looks as though it will liquidate its huge quasi-sovereign subsidiary companies MOITK and MOIA due to “mismanagement” (a codeword for “endemic corruption”) at those companies, and possibly within (code for “definitely within”) the Oblast government itself. Both MOITK and MOIA are fully owned by Moscow Oblast, are major players in the Russian capital market, and have bond issues outstanding.

And all this doesn’t account for the currently devaluing ruble in which the bonds are denominated.

The interest rate for the bonds the city government did manage to sell was set at 15%. Considering it would not be a surprise – by some estimates – for inflation to run as high as 20% this year in Russia, and that most analysts expect the government to allow the ruble to devalue by at least another 15%, investing in the Moscow City bonds at 15% interest means one will likely be left with a hefty loss – even excluding from the equation the default risk spread over AAA securities such as bunds, T-bonds or British gilts.

Where do I sign up?

I asked a contact with more knowledge of capital markets than I (not difficult), and he admitted that there was no fundamental justification to buy these bonds. He claimed, however, that they do make sense as a method of managing ruble liquidity – people need somewhere to park their cash, and if one needs to hold significant quantities of rubles the Moscow City bonds at least offer some return, even if it is negative.

What’s really funny, he said, is that after the auction Moscow City claimed it expected to sell only RUB4-5 bn (about 30% of the total), but were surprised that it did even worse than expected. I think I covered above the reasons why the issue was blatantly going to struggle, but why on God’s green Earth would one try to issue RUB15 bn if at best one expects to sell RUB5 bn?

It’s a crazy world.

Filed under: Economics, Russia, , , , , ,

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