beyondbrics

Russia’s stock market has had a lacklustre summer. Yet the country’s bond market has rallied – making up ground lost in the spring, when prices plunged on fears of defaults in Greece and elsewhere. While peripheral eurozone bond markets remain troubled, Russia’s has surged ahead – and it’s thanks to risk-averse banks.

In April, Russian state Eurobonds due to mature in 2020 were issued at a price of 99.3 to par. They dived as low as 92.5 in May as investors dumped them, partly on perceptions that the pricing was too tight, and partly because of the Greek financial crisis.

But over the summer, they rallied to 103, and yields have consequently fallen 150 basis points. “The market has been in a rally mode since June,” Nikolay Podguzov, head of bond strategy at Renaissance Capital, a Moscow-based investment bank, told beyondbrics.

Russia’s low sovereign debt levels makes it an attractive destination for foreign currency bond market investment, say traders, and the overall trend is evident in many other emerging markets, which have been benefiting from abundant global liquidity. “There is no Russia-specific driver, as far as I can tell,” Podguzov said.

Large corporate Eurobonds have also enjoyed success – Sberbank, Russia’s largest bank, issued a five-year Eurobond on June 30 which was priced at 369 basis points over US treasuries when issued. Now it trades at a 335 spread to treasuries.

MTS, a mobile-phone operator, issued a Eurobond on June 15 at 531 basis points over treasuries, which now trades nearly 150 basis points lower, at 390.

Russia’s ministry of finance is taking advantage of benign market conditions to issue ever more rouble-denominated debt – a jump of 60-70bn roubles per month in June and July, which it is having no trouble selling. So great is the appetite for high-quality rouble debt that, despite the jump in issuance by the state, yields have barely changed.

Chris Weafer, head strategist at investment bank Uralsib, said that investors looking for emerging market exposure are increasingly choosing domestic bond markets as a place to invest because these markets are less correlated with international markets than equity markets are:

Bond markets reflect the domestic story which across many emerging markets is good. That is opposed to equity markets which are vulnerable to what’s going on on Wall Street.

He added that Russian fixed-income markets are especially strong because the Russian fiscal story is quite good – inflation and therefore interest rates have fallen dramatically since 2009. With a budget deficit officially estimated to be 5 per cent of GDP in 2010, the finance ministry will have to finance part of the deficit with rouble debt, as reserve sales and foreign currency borrowing are limited.

Russia’s central bank has been pumping credit into banks to keep them afloat. In turn, the banks, still not fully trusting the creditworthiness of companies and consumers, have round-tripped these credits back into government debt.

Weafer said:

Investors have a lot more confidence in Russia’s fiscal strength than they do in Russia’s real economy, and the way they have been playing that is through the debt side.

Related:
Reforming Russia: changing the engine on a rusting boat, beyondbrics
In depth: the Greek crisis, FT