Moscow breaks the ice

Even in the best of times, emerging-markets debt isn’t an easy sell.

But reintroducing Russian credits to wary investors amid turbulent international markets is a true high-risk venture. For Sergey Pakhomov, however, the gamble paid off.

The chairman of Moscow’s municipal debt committee succeeded in selling E300 million euros ($270 million) of three-year Eurobonds last month, at a yield of 10.25 percent. It was the first issue by a Russian entity since the federal government defaulted on its debt in 1998 and nearly triggered a global market collapse.

The timing of the new offering wasn’t ideal, but then, Pakhomov had little choice. New federal regulations for regional budgeting required Moscow to repay the last $735 million of its international debt this year.

The city got a helping hand from Moody’s, which raised its rating on Moscow one notch, to B, before the bond sale. That’s hardly investment grade, but the fact that the city will have repaid $1.8 billion in foreign obligations between 1998 and the end of this year “shows they have flexibility in their budget to meet extremely high debt service payments,” says Moody’s analyst Elizabeth Rudman.

Pakhomov doesn’t hesitate to tout Moscow’s financial wherewithal: The city’s tax revenues are expected to climb 12 percent this year after a nearly 50 percent rise in 2000. “We have a very good story to tell,” he says. “We’re a very powerful economic entity.”

Moscow’s ability to get the deal done encouraged some Russian corporations to test the waters. But at least one issue - Gazprom’s - was put off at the last minute by the high yield demanded.

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