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Bridport Outlook- Romancing the ruble

May 10th saw President Putin announce his wish for a fully convertible RUB on July 1st 2006 and in doing so pre-maturely capped a series of positive regulatory changes concerning Russia’s capital account. The liberalisation will impact various sections of the economy, and we see the domestic RUB bond market as the area most likely affected.

Consequently we expect a number of investors will move into Russian names in an attempt to gain both exposure to the RUB as well as enjoying the extra 50-80bps yield that Russian domestic paper trades over its Eurobond equivalents. In the first of two comments on Russia, we examine the move to liberalisation, Russia’s economy, its domestic debt markets and the RUB as a currency. We will follow up this piece towards the end of June with a comment that will describe in detail the mechanics of the Russian debt market, paying particular attention to available RUB bonds, settlement, custody and taxation. 



They say that adversity is the best teacher, in which case it is hard to think of an education better than that undertaken by the Russian domestic debt markets. Foreign investors tend to view Russian domestic debt markets with great scepticism and associated caution. Who can blame them? Granted access in 1996, times were originally fruitful for the innovative foreign investor who piled into the GKO market whilst enjoying yields of 40% for their labours. But the Russia of 1998 was a distinctly shaky place, and GKO yields almost doubled to 70% just prior to the joint RUB devaluation and GKO default of August 17th 1998.

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