Russian bonds are once again attracting investors. Prices have rebounded strongly over the past 12 months and yields have fallen from historical highs following the financial crash of 1998.
Though Russian equities are cheap compared with fundamentals and trade at a massive discount simply for being Russian, interest in them is still limited. For those bullish on Russia they may offer outstandingly good value, but for the more conservative, perceived political risks, a stifling and sometimes-corrupt business environment and a volatile market continue to be a deterrent.
Bonds on the other hand look much safer, offer good growth potential and still guarantee favourable yields according to Eric Kraus, head of strategy at NIKoil Capital Markets in Moscow. Despite the gut-wrenching crash and T-bill default of 1998, “Russia poses a virtually zero medium-term default risk on bonds,” he says.
By making good on Eurobond coupons during those toughest of times, Kraus believes the country has shown a firm commitment to its foreign currency obligations. This is supported by the fact that the government has agreed to repay Soviet debt to the Paris Club, despite the Club’s refusal to follow the London Club’s example and grant partial debt forgiveness.
Moreover, there is simply no need to default. The economy is roaring along at full speed. Russia is currently enjoying a massive trade surplus, a 2% budget surplus and has courageously stuck to an extremely tight fiscal policy. Even were the price of oil to fall further from its present level, already well off last year’s highs, the country would still maintain a positive current account balance, and Russia now boasts reserves to cover more than two years of debt repayments.
In recent weeks, however, there has been a dark lining to this silver cloud on Russia’s financial skyline. As market sentiment dropped on the near-death experience in Argentina, Russian bonds took a buffeting and dropped between 10% and 15%, though they quickly recovered most of those losses.
“The market reaction was not fair from the point of view of Russian risk or the fundamentals here, which remain good and strong,” says Sergei Petrov, head of fixed income for Aton Brokerage in Moscow. Instead, the losses reflected selling pressure from US and UK funds determined to rebalance their emerging-market bond portfolios following the heavy sell-off in Argentina, which accounts for 20% of the emerging-market bond market.
