UPDATE 5-Russia raises 1 bln euros at 3 pct yield in Eurobond sale - FinMin

(Changes source)

MOSCOW, Nov 27 (Reuters) - Russia raised 1 billion euros ($1.13 billion) with a yield of 3.0 percent on Tuesday with the sale of its first euro-denominated Eurobond in five years, the Finance Ministry confirmed, despite an escalation of tensions with Ukraine.

The ministry confirmed what a financial market source had earlier told Reuters.

Russia, which wants to cut its reliance on the U.S. dollar, placed the seven-year Eurobond just days after its forces fired on and seized three Ukrainian naval ships off Crimea, saying they had illegally entered its territorial waters. The incident has triggered fears of a wider conflict.

Senior European politicians have raised the possibility of new EU sanctions against Russia over the incident. Russia is already under Western sanctions over its 2014 annexation of Crimea from Ukraine and over other issues.

The finance ministry probably went ahead with the Eurobond now because it had been in the works for months, said Ivan Tchakarov, chief economist at Citi in Moscow, adding that it may also have wanted to demonstrate that it can sell bonds despite negative political circumstances.

Russia may also be seeking to diversify away from dollars, Tchakarov said, adding: “I can’t see other reasons as we clearly understand that Russia is not in need of money.”

The Eurobond settlement date is scheduled for Dec. 4, 2018. Its maturity date is Dec. 4, 2025, according to the source.

VTB Capital is the sole bookrunner of the issue.

Russia, rated as BBB- by Standard&Poor’s and Fitch rating agencies, has chosen the euro to issue its Eurobond amid uncertainty over whether Washington will impose sanctions on holdings of Russian state debt.

Even though the market has priced in the risk of such sanctions, especially penalties on holdings of new Russian debt, foreigners still own a large chunk of Russian bonds. The share of Eurobonds held by foreigners stood at 46.3 percent as of Oct. 1.

The finance ministry, which has no real need to borrow on the global market thanks to a budget surplus amid higher-than-expected oil prices, has sent mixed signals about its Eurobond plans.

In September, Finance Minister Anton Siluanov said market volatility was too great to tap the Eurobond market. Weeks earlier, the ministry had not ruled out a euro-denominated Eurobond but said a dollar-denominated Eurobond was more likely. ($1 = 0.8835 euros) (additional reporting by Anton Kolodyazhnyy, Anastasia Teterevleva and Denis Pinchuk; editing by Larry King and Gareth Jones)