Russia's already-fraught ties with the West have soured further after London accused it of poisoning former double-agent Sergei Skripal in Britain this month, leading to countries around the world expelling scores of Russian diplomats.
Russia denies the accusation and has expelled some British diplomats in retaliation.
So far though, the tensions do not seem to have spooked investors too much - a far cry from 2014 when stinging economic sanctions imposed on Moscow after its annexation of Ukraine's Crimea region led to foreign investors fleeing Russian markets, triggering a near-collapse of the rouble.
On Wednesday, Russia's finance ministry took in bids of over 75 billion roubles at an auction of 30 billion roubles ($520 million) of treasury bonds. It was the first issue since the Western expulsions of Russian diplomats. The cut-off yield on the eight-year paper was 6.79 percent, down from 6.86 percent at the previous sale in late February.
The market "seems inclined to look past this episode in terms of impact on local assets," said Phoenix Kalen, a strategist at Societe Generale in London, referring to the latest diplomatic spat between the West and Russia.
The ministry did not say what percentage of the bids were submitted by foreign investors, who tend to buy Russian bonds - or OFZs - in the secondary market from Russian banks.
One sweetener for them is that Russian bonds pay real -- or inflation-adjusted -- yields of almost 5 percent, well above those offered by most other big emerging economies.
(GRAPHIC - Emerging Markets Real Yields: https://reut.rs/2I7tAhx)
Russia's portion of the GBI-EM index for local currency emerging debt has brought returns of 4.4 percent so far this year in dollar terms, according to JPMorgan, which told clients on Wednesday it was staying "overweight" on OFZ.
If anything, OFZ securities have become even more alluring after S&P Global's decision last month to raise the country's credit rating back to investment grade.
That for many may outweigh geopolitics, while President Vladimir Putin's recent re-election may also have assured some investors of political continuity in the country.
Analysts said Russian government debt is still seen as a relatively safe bet due to low default risk - Moscow has more than $450 billion in foreign currency reserves - and also because even extended Western sanctions do not affect sovereign debt.
And with the central bank steadily cutting interest rates, foreigners' holdings of OFZ bonds stood at nearly $40 billion, or 33.9 percent of all OFZ bonds as of Feb. 1, the last period for which data is available. A year ago, they held $28 billion, or 28.1 percent.
"The market is not too concerned from a rates angle, just because of the inflation story, there is no risk to it. The U.S. Treasury...made it clear they are not looking to ban any trading on sovereign debt, including OFZs," said Kaan Nazli, senior economist for emerging debt at asset manager Neuberger Berman.
As proof that foreigners remain unfazed by the diplomatic spat, Russia trumpeted a $4 billion dollar bond sale on March 16 at a yield well below what was originally indicated, just days after the attack on Skripal and his daughter.
Moscow said 49 percent of the Eurobond issue maturing in 2047 was purchased by Britain-based investors.
SOME JITTERS
There are however some signs of jitters. The premium demanded by investors to hold Russian sovereign dollar bonds over U.S. Treasuries has risen to the highest since mid-December, up some 25 basis points this month.
Kalen of SocGen said the diplomatic spat could in the longer-term "weigh on the narrative" for Russia.
For now though, Russian companies look set to proceed with plans to raise capital overseas. European Medical Center, one of Moscow's largest private healthcare providers, is still set for a stock market listing in May or June, possibly in London, two Moscow-based sources said.
"All these expulsions are rather a formality which creates a lot of noise," a banker based in Moscow said.
Bankers said local investment banking activity has not stalled, as it did in 2014 when the annexation of Crimea came alongside a huge oil price drop. Crude futures are currently around $70 a barrel, supporting Russian finances.
"There is not yet any noticeable reaction in the markets. The sentiment is negative but I think we have seen worse... Step-by-step work (on share listing) is continuing," said another Moscow-based banker.
A Moscow initial public offering (IPO) of information technology services company IBS is still expected in April.
Banking sources say insurer RESO is also considering an IPO next month, while state-run leasing company STLC - which failed to place a dollar bond in February - has hired banks to market another deal, now expected after Easter.
As far as investor demand for such offerings is concerned, it is too early to gauge the impact, three London-based capital markets bankers said.
One of them said soaring demand for the recent Russian Eurobond issue demonstrated appetite for Russian assets. The crisis has not affected any of the Russian deals his bank was working on, he added, speaking on condition of anonymity.
Gold producer Polyus which listed shares in London last year , held an investor day in London this month, telling investors it would consider boosting its free float to 25-30 percent from the current 16 percent. But the decision depended at least partly on geopolitics, it added.
(Reporting by Olga Popova in Moscow and Dasha Afanasieva in London; Additional reportin by Karin Strohecker in London, Polina Devitt and Oksana Kobzeva in Moscow; Writing by Andrey Ostroukh; Editing by Sujata Rao and Hugh Lawson)
By Olga Popova, Andrey Ostroukh and Karin Strohecker
