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Russia placing blockbuster $7 billion Eurobond deal

By Oksana Kobzeva and Lidia Kelly

MOSCOW (Reuters) - Russia will raise $7 billion in Eurobonds in the largest emerging markets sovereign offering since at least 2000, fully covering its foreign borrowing plan for 2012, sources close to the deal said on Tuesday.

Capitalizing on strong oil prices that have boosted confidence in Russia's fiscal performance, the dollar offering attracted bids of $17 billion, leading the Finance Ministry to slightly tighten yield guidance on the three-tranche deal.

Russia plans to issue $3 billion in 30-year paper at 250-255 basis points over U.S. Treasuries, establishing a new benchmark long bond in its first international offering since April 2010.

It will also place $2 billion in 10-year paper at 240-245 basis points over Treasuries and $2 billion in five-year bonds at 230-235 basis points over, the sources said.

That yield guidance represented a tightening of up to 5 basis points from earlier indications on the five- and 10-year bonds and of 10-15 basis points on the 30-year paper, which met strong interest from investors.

Pricing is expected on Wednesday.

"They are paying to get the size away," said a bond trader in London.

According to Thomson Reuters data, the deal is the largest by an emerging markets sovereign since 2000. In the emerging markets space it is the biggest since state-controlled Brazilian oil firm Petrobras raised $7.2 billion in February.

PRICING IT CHEAP?

Despite the revised guidance, Russia offered enough of a yield pickup to attract buyers at a time when global markets are in 'risk on' mode and political risk in Russia has ebbed after Vladimir Putin's victory in a presidential election on March 4.

"These guidelines provide a sufficiently large discount to the market - on average about 20 basis points," said Denis Poryvai, an analyst at Raiffeisenbank.

"Now, the Russian curve trades in the range 250-280 basis points over the Treasuries curve."

In contrast to the 2010 deal, which performed poorly after being priced aggressively, so-called 'grey' market trading suggested short-term investors might be able to turn a quick profit.

The five-year bond was trading 25-50 basis points up in price, the 10-year higher by 25-75 pips and the 30-year by 62.5-75 ticks, market sources in London told IFR, a Thomson Reuters news and markets analysis service.

The guidance puts the yield premium on the 30-year paper at 105-110 basis points over similarly rated Mexico and 125-130 basis points over Brazil, a gap that many traders see narrowing on expected Russian outperformance.

"Investors see this and will buy the Russian paper with an appetite ... In the medium term spreads will narrow," said Vadim Khanov, a bond trader with Gazprombank in Moscow.

Gazprombank said strong demand for the 30-year tenor reflects a deficit of long-term sovereign issues in the emerging market universe.

Mexico issued $2 billion worth of 2044 bonds at a yield of 4.84 percent and $2 billion of 10-year bonds at 3.71 percent earlier this month. Brazil borrowed $750 million overseas in 2021 notes at a yield of 3.45 percent.

GOOD FISCAL STANCE

Russia's strong fiscal position, with sovereign debt of around 11 percent of gross domestic product, puts it in a position to focus on price and maturity as it seeks to create a benchmark curve for corporate issuers.

But the country's finances are likely to be strained in the coming years due to planned increases in state spending. If oil prices fall back below $100 a barrel, the country may see a bigger than expected budget deficit in 2013-2014.

This year, Moscow's finances are likely to be fine, with oil prices above the $117 per barrel needed to keep the budget balanced, ensuring a positive current account balance and windfall revenues to save in its budget reserve funds.

Prices for Urals, Russia's chief crude export brand, now at $122.79 per barrel, have risen around $15.50 since the start of the year, according to Reuters calculations.

Russia plans to borrow around $7 billion on international markets each year until 2014, and under current funding plans, the public debt stock will not exceed 16 percent of GDP in 2014.

The banks running the deal are VTB, Sberbank, Citi, Deutsche and BNP Paribas.

(Additional reporting by Carolyn Cohn in London and Matt Toole in New York; Writing by Lidia Kelly; Editing by Douglas Busvine)

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