On the Determinants of Sovereign Eurobond Spreads in Russia

Abstract

The cost of external sovereign borrowing is divided into two components — the first reflects the price of so-called risk-free borrowing on the global market and the second represents the level of sovereign credit risk for a given country. The paper analyses the determinants of risk premium for Russia-issued sovereign dollar-denominated Eurobonds and the impact of oil prices on the Russian sovereign Eurobonds spread in particular. While there are many empirical studies on the determinants of the sovereign spreads for emerging markets countries, the studies on this topic for oil-dependent countries or for Russia specifically are scarce. The paper systemizes the results of the issues for emerging markets countries and also gives a comparison with the adjacent topic — determinants of sovereign credit default swaps. The model developed in the paper uses the well-known GARCH technique with monthly data from 2003 to 2016, including EMBIG index, S&P500 and VIX indices, oil prices and the macro-indicators of the Russian economy. The analysis justifies the foremost role of the global factors as determinants of the Russian spread and gives a row of elasticity estimations. In particular, the impact of oil prices on Russian sovereign Eurobond spreads is proved to be negative and significant. The results of this study could be used in the planning and elaboration of the Russian sovereign debt policy. In particular, the findings are relevant to the strategy of optimization of expected borrowing costs.