Russia on Thursday raised $5.5 billion in its first international bond issue since the 1998 financial crisis as it seeks new ways to bolster its finances after the financial crisis. The issue of the 5-year eurobond with a volume of $2.0 billion and a separate 10-year bond with a volume of $3.5 billion was “massively oversubscribed”, official news agency RIA Novosti reported. The Interfax news agency said the yield of the 5-year eurobond was 3.741 percent and 5.082 percent on the 10-year bond. The issue is a landmark event in Russia's modern finance policy and officials have said it could borrow a total of just under 18 billion dollars from the international markets this year. Russia had avoided borrowing from the international bond markets after the 1998 financial crisis when its economy went into meltdown and the state defaulted on its debt. But the 2008 global financial crisis - which led to the economy shrinking by 7.9 percent last year - has forced the government to look for other ways to fill the state coffers. “The eurobond issue is a significant event for the emerging market bond market as it marks Russia's return to international capital markets for the first time since its default in 1998, excluding debt exchanges,” said Ed Parker, Head of Emerging Europe Sovereigns at Fitch Ratings. He said the issue will be used for general governmental purposes, in effect financing part of the 2010 budget deficit. Russia ran a deficit in 2009 equivalent to 5.9 percent of GDP, the country's first such deficit in a decade. It now faces a prolonged period of deficits, with the government predicting a 6.8 percent deficit in 2010 and 4.0 percent in 2011. Prime Minister Vladimir Putin predicted this week that the deficit would be whittled down to 3.0 percent of GDP in 2012 and warned: “In the future it is necessary to return to a zero deficit.” In order to overcome the effects of the crisis on the budget, Russia has also been withdrawing tens of billions of dollars from state funds that were amassed during the pre-crisis years of booming oil prices. It is also moving to relaunch a largely mothballed privatization drive. “In the agency's view it is a prudent step to re-access international markets before depleting the Reserve Fund so as to maintain a buffer against the risk of a sharp drop in oil prices,” said Fitch's Parker. Meanwhile, Russia and Ukraine are forging ahead with a consortium to modernize Ukraine's gas pipeline network, Russia's energy minister was quoted as saying Thursday, in an indication of stepped up cooperation between the two countries whose prior energy disputes had left much of Europe shivering in the winter. The extensive, but dilapidated network, is a key transit route for Russia's gas exports and carries about 20 percent of the gas consumed in the European Union. Modernizing it would not only be cheaper for Russia than building a new network, but could also help reassure European countries that have been hit hard before amid a price dispute between Russia and the Ukraine sharply reduced exports to Europe. Energy Minister Sergei Shmatko said efforts to create the consortium would be stepped up, according to Russian news agencies, details on how it would work were absent. Russia in the past had pushed for full control of the Ukrainian network, which would strengthen the Kremlin's influence in Ukraine It was also unclear how such a consortium would fit in with the European Union's promise last year to loan Ukraine billions of euros (dollars) to upgrade the network. Russian leaders were irate at being left out of the loop in that proposal. Speaking in Kiev on Thursday, Ukrainian President Viktor Yanukovych did not mention any consortium cooperation plans, and said only that Ukraine is not willing to give full control of the network to Russia. Calls to the Ukrainian government, the president's office and state gas company Naftogaz to verify the country's intentions over the consortium went unanswered. Russia began pushing for the consortium a decade ago, but the project was put on hold when pro-Western President Viktor Yushchenko came to power in Ukraine in 2005. Last year, German Chancellor Angela Merkel called for Russian participation in the pipeline upgrades because the network serves several countries. Shmatko's words are the second strong signal in two days that Yanukovych is steering the country back toward Moscow-dominated politics after five years of Yushechenko's Western-oriented presidency. Russian President Dmitry Medvedev and Yanukovych on Wednesday signed a deal extending the Russian navy's use of the Black Sea port of Sevastopol by 25 years. Medvedev said Ukraine will receive sizable discounts on gas imports in return. Prime Minister Vladimir Putin hinted at a meeting with his Ukrainian counterpart, Mykola Azarov, in March that Russia would be willing to cut gas prices for Ukraine if Moscow and Kiev form a consortium to jointly operate the Ukrainian pipeline network. Putin insisted, however, that Russia is not seeking to buy out the network and would like to see the European Union as partners in the consortium. For years, Ukraine bought Russian gas at well below market prices.
