Wednesday, 02 October 2013

Armenia Places Its First Eurobonds

Published in Field Reports
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Haroutiun Khachatrian (the 02/10/2013 issue of the CACI Analyst)

The Armenian government has recently faced much criticism making the case that it has lost its ability to take decisions independently. This is a reaction to the September 3 statement of Armenia’s President Serzh Sargsyan, who said his country was seeking to join the Russia-led Customs Union, thus destroying the results of four years of negotiations with the EU over an Association Agreement, which would have been finalized at the Eastern Partnership summit in Vilnius in November. Sargsyan’s move was widely interpreted as a result of Russian pressure on a small and weak country that needs support in many areas. 

At the same time, the Armenian government has made at least one strong move that might help it to partly reduce its dependence on Russia, as it entered the international debt market. As of December 31, 2012, Armenia’s state debt was reported to be close to US$ 4.4 billion, which was below 45 percent of the country’s GDP. (No newer data are available. In addition, Armenia’s GDP is highly season-dependent). More than 80 percent of that sum constitutes loans taken from external sources, including the loan of US$ 500 million provided by Russia in 2009, when the global economic crisis hit Armenia. The remaining part of the external debt originates mainly from different low-interest sources, for example the World  Bank.

In 2009, Armenia obtained a loan from Russia of US$ 500 million at the rate of LIBOR+3% over 15 years including a four-year grace period, implying that an interest of around US$ 10.9 million would be paid that year and around US$ 20 million in each of the following years. However, the government and Armenia’s Central Bank must repay US$ 225 million in 2013, a significant amount for an economy of Armenia’s size. Under these conditions, the government decided to release its first dollar-nominated bonds (eurobonds) to raise money in the international markets. It was an unexpected decision that has not been forecasted or planned in any official government documents.

The placement took place on September 19 when the Armenian bonds named “Kardashian bonds,” named after Kim Kardashian - a star of the U.S. reality TV show “Keeping Up With The Kardashians,” were floated. Three large banks,  Deutsche Bank, HSBC and JP Morgan, acted as underwriters. Armenia raised US$ 700 million from the sale, which set a final yield of 6 percent for the bonds which have a maturity period of seven years.

Specialists say that these result should be considered quite successful for a small country under embargo from two of its neighbors. For example, Brazil’s one-year bonds have a yield above 9 percent, not to speak of Greece. Armenia’s rating was  Ba2 by Moody’s and BB- by Fitch. “Public finances are a lot stronger in Armenia than Serbia, but par with Georgia ... Political stability - stronger in Armenia these days than either Georgia or Serbia. Net-net, Armenia probably should price wide to Georgia but inside Serbia,” a Standard Bank officer was quoted as saying.

As for the use of the money earned, Armenian officials have previously said that it would most likely be used for early redemption of the Russian debt. The raised money extends the volume of the debt and hence the problems related to the interest payment can easily be resolved. Although the revenue from the bonds is more expensive than the actual debt, the political outcome of this change would be important as Russia will lose a strong lever on Armenia and, as a result, the latter may obtain more room for maneuver in its further negotiations either with Russia or the EU. Some local observers do not exclude the possibility of new contacts between the EU and Armenia after Armenia’s failure to initial its Association Agreement at Vilnius in November.

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The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.

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