Russia's helping hand to Ukraine may backfire on Russian debt
MOSCOW Dec 18 (Reuters) - Russian Eurobonds were steady on Wednesday after Moscow threw Ukraine a $15 billion lifeline, but buying its neighbour's junk-rated debt with cash from a rainy day fund may raise questions about the safety of Russian assets.
Russia agreed to tap one of its oil funds, cash from which had been earmarked to cover a pension system deficit, to buy up Ukraine's bonds and to slash the price of gas exports under a deal that keeps the cash-strapped country in Moscow's orbit.
The yield on Russia's five-year dollar Eurobond was little changed at 2.811 percent on Wednesday, while the yield on Russian paper maturing in March 2030 fell 4.058 percent from 4.150 percent.
Russia, the world's largest oil producer is well placed in the short run to withstand sliding prices, thanks to sizeable cash reserves, which stand at about half a trillion dollars.
But with the Russian economy running at the slowest pace in four years, there is little prospect it will be able to top up its reserve funds as it used to do during the boom years.
"At some point investors will realise that Russia is increasing its credit exposure to Ukraine, which is a much lower credit quality sovereign," said Stanislav Petrov, a strategist at BNP Paribas in London, adding that it eventually would impact Russian credit spreads.
Russia's dollar bond spreads tightened by four basis points, to 215 bps over U.S. Treasuries, as measured by JP Morgan's EMBI-Global index.
The Reserve Fund, the budgetary shield against external shocks is expected to increase to 4.4 percent of GDP in 2014 from 4.2 percent in 2013.
The National Welfare Fund, intended to support the pension system, is seen contracting to 3.9 percent of GDP in 2014 from 4.2 in 2013.
"We have not yet seen what Russia will be getting out of this and for me that is the worrying part. Either it's something they are not revealing or it's still up in the air," said Sergei Strigo, head of emerging debt at Amundi in London.
Russian Finance Minister Anton Siluanov said the rescue deal should not decrease Moscow's credibility among investors, even though it accounts for nearly a fifth of the oil fund.
"There is no basis for that," Siluanov told Reuters. "We will be looking for other sources and ways to lower the amount used from the National Welfare Fund." (Reporting by Maya Nikolaeva, additional reporting by Sujata Rao; Editing by Catherine Evans)