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* Government says foreigners bought bulk of bond
* Minister: this shows appetite for Russian assets
* Sanctions uncertainty put off some big players (Adds finance minister's statement, analysts' quotes)
By Lidia Kelly, Oksana Kobzeva and Kira Zavyalova
MOSCOW, May 24 (Reuters) - Russia raised $1.75 billion onTuesday in a Eurobond issue with foreigners the biggest buyers,a placement officials said showed there was internationalappetite for Russian assets despite Western efforts to scare offinvestors.
But market sources told Reuters the major financialinstitutions that dominate Western debt markets sat out theplacement, while some in the market said the amount raisedsuggested demand had been modest, even among Russian buyers.
Russia's finance ministry had not given an explicit targetfor the amount it wanted from the placement, the first sinceWestern financial sanctions were imposed on Moscow in 2014 overits role in the Ukraine conflict.
However, the government has previously said it sought toraise up to $3 billion in foreign currency debt this year,significantly more than the amount raised on Tuesday.
"The issue was substantially smaller than expected," saidNeil Shearing, chief emerging markets economist at CapitalEconomics in New York.
"But the fact that around three-quarters of the placementappears to have been taken up by international investors meansthat the government can just about badge this up as a success."
The issue, the first in three years, will help thegovernment, battered by a slowdown and the sanctions, to fillgaps in the budget.
But the Eurobond was also an important symbolic test ofwhether Russia, despite its standoff with the West over Ukraine,could still successfully tap Western debt markets.
The U.S. government and the European Commission had warnedinvestors of the risks of dealing with Russia while sanctionsremain in force. Banking industry sources said that was athinly-veiled warning to stay away from the placement or facenegative consequences.
"More than 70 percent of the issue went to foreigninvestors. It was indeed the group we were aiming at," FinanceMinister Anton Siluanov said in a statement.
"Despite attempts to deprive foreign investors of theopportunity to invest in profitable Russian assets, the volumeand the quality of applications were at a good level. We aresatisfied with the placement," Siluanov said.
"Despite the informal pressure .... the demand of investorsfrom different regions showed a high level of trust in Russia asan issuer."
WESTERN PRESSURE
The book was open until Tuesday evening in Moscow, anextension of an earlier deadline from Monday because investorshad continued to sign on, a financial source said earlier.
Demand for the issue was over $7 billion. The final yieldwas set at 4.75 percent, in the middle of an initial range of4.65-4.90 percent.
Russia last issued a Eurobond in 2013, a hiatus due in largepart to the sanctions. They do not explicitly forbid anyone fromhandling Russian sovereign debt, but create added uncertaintiesand risks for investors.
Big Western and Chinese banks were invited by Russia'sgovernment to organise the offer but none signed up,discouraging some other major players from getting involved.
The sole organiser was VTB Capital, a unit of state-ownedRussian lender VTB which is subject to sanctions. The bigsettlement agencies, which usually act as guarantors in bondtransactions, did not take part.
Barclays Bank said it would not include the Eurobond in itsindex, making the bonds less attractive for some big fundmanagers who use the index as a benchmark for their portfolios.
Those factors made some big Western investors wary, despitethe attractive terms on offer for the bond.
"At the moment we are abstaining because of the lack ofclarity around the liquidity, and compliance is making uscareful," said Rob Drijkoningen, global co-head of emergingmarkets debt at Neuberger Berman.
The identity of the investors who bought the Eurobond hasnot yet been disclosed, so it was not possible to independentlyverify the government's assertion about foreigners buying thebulk of the bond.
Russian banks have foreign subsidiaries that could have bidfor the bonds, creating an illusion of strong overseas demand.
"Feedback I saw was that most Western investors ... did notparticipate and stayed on the sidelines," said Timothy Ash, headof emerging markets strategy at Nomura. (Additional reporting by Katya Golubkova, Alex Winning and KiraZavyalova in MOSCOW; Writing by Katya Golubkov and Lidia Kelly;Editing by Christian Lowe and Gareth Jones)
