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Bonds are back

Russian bonds are looking much safer than equities, offering good growth potential while still guaranteeing favourable yields. Once again, investors have their eyes on bonds.

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.

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