Medvedev Bond Gain Shows Luzhkov Ouster No Yukos for Market: Russia Credit
Russian President Dmitry Medvedev
Joshua Roberts/Bloomberg
Russian President Dmitry Medvedev,s een here, published a manifesto last year exhorting people to join him in fighting corruption and to help reduce the world’s biggest energy-exporting economy’s reliance on natural resources.
Russian President Dmitry Medvedev,s een here, published a manifesto last year exhorting people to join him in fighting corruption and to help reduce the world’s biggest energy-exporting economy’s reliance on natural resources. Photographer: Joshua Roberts/Bloomberg
Russian President Dmitry Medvedev’s ouster of Moscow Mayor Yury Luzhkov is reinforcing investor confidence in the government’s ability to take charge of the economy as benchmark foreign bond yields tumble to lows.
Russian dollar notes due 2015 rose today, pushing the yield down 3 basis points to 3.466 percent, the lowest since the bonds were sold in April, according to data compiled by Bloomberg. Bank of Moscow Eurobonds due in November rose, pushing the yield down 149 basis points to 2.802 percent, the biggest decline in 10 weeks, after rising 137 basis points yesterday.
Medvedev, who vowed to fight corruption after he took office in May 2008, dismissed Luzhkov yesterday after 18 years in office amid allegations he showed favoritism toward his wife, billionaire developer Yelena Baturina, in approving contracts. Luzhkov denied any wrongdoing on Sept. 18, saying Baturina would be “even richer” if she wasn’t his wife, according to the state-run RIA Novosti news service. Russia is ranked 146th on Transparency International’s least-corrupt countries list, worse than Brazil, China and India.
“Mayor Luzhkov represented the sort of administration that President Medvedev wanted rid of,” Chris Weafer, chief strategist in Moscow at UralSib Financial Corp., said in an e- mailed note to clients yesterday. “It’s the highest profile action he has taken to remove old school bureaucrats and a powerful response to persistent accusations of cronyism and corrupt practices.”
Medvedev Manifesto
Medvedev, 45, published a manifesto last year exhorting people to join him in fighting corruption and to help reduce the world’s biggest energy-exporting economy’s reliance on natural resources. He has touted the creation of a Russian “Silicon Valley” outside of Moscow, promoted the capital’s development as a future international financial center and pushed for making the ruble a regional reserve currency.
Luzhkov, 74, returned from a week-long vacation Sept. 27 refusing to step down in the face of Kremlin pressure. Sergei Tsoi, a spokesman for the former mayor, had his mobile phone switched off yesterday.
Medvedev’s showdown with Luzhkov signals a turnaround in investor perceptions toward Russia, which soured amid the 2008 war with neighboring Georgia and the Kremlin’s prosecution of Mikhail Khodorkovsky, once Russia’s wealthiest man and the head of oil producer OAO Yukos Oil Co., according to Cornel Bruhin, a fund manager with Swiss private bank Clariden Leu AG.
‘Clean Sacking’
Khodorkovsky was sentenced to eight years in a Siberian prison in 2005 for tax evasion and fraud, charges he claims were retribution for his political opposition to then-President Vladimir Putin. He faces an additional 22 ½ years in jail if found guilty in a second trial. The arrest in October 2003 prompted foreign investors to withdraw $9.5 billion from the country and spurred a 2 percent slide that month in the benchmark government dollar bonds due 2030, according to Bloomberg data.
“In the past this kind of sacking would have hammered assets but this time it was clean and properly solved,” said Bruhin, who helps manage $3.5 billion of emerging market assets at Zurich, Switzerland-based Clariden. Bruhin said he bought Bank of Moscow bonds yesterday after Luzhkov’s ouster. “Medvedev is changing the way people think about politics and the Russian economy,” he said.
‘Buying Opportunity’
Bank of Moscow dollar bonds due March 2015 plunged, sending yields up 30 basis points, or 0.30 percentage point, on Sept. 14, after media attacks on Luzhkov, including a television documentary blaming him for such problems as corruption and traffic jams, began Sept. 10. Bank of Moscow is more than 46 percent owned by the city, according to an August presentation by the bank. Units of Goldman Sachs Group Inc. and Credit Suisse Group AG also hold stakes in the lender.
The drop in price makes the bonds a “buying opportunity,” according to Bruhin, Moscow-based investment bank VTB Capital, and Dmitry Barinov, a fund manager at Union Investment Gmbh, which also owns the bank’s bonds.
“The bonds are a clear buy once the dust settles,” Barinov said yesterday by phone from Frankfurt.
The 2015 bonds are yielding 6.283 percent, after rising 4 basis points to 6.319 percent yesterday. The yield was near a record-low of 5.89 percent on Sept. 13.
‘Medvedev Man’
The firing of Luzhkov isn’t “significant” enough to buoy Russian debt prices, Paul McNamara, who oversees $4.5 billion of emerging market debt, including ruble bonds sold by Moscow, at Augustus Asset Management Ltd., said in a phone interview from London yesterday.
“There is absolutely no financial pressure on either the city or the Bank of Moscow so I am pretty emphatic this is not important in credit terms,” McNamara said. “This is done to replace somebody who is not a Medvedev man with a Medvedev man and it’s is driven by politics rather than reform.”
Vladimir Resin, a Luzhkov deputy, was named as acting mayor. Putin said yesterday he and Medvedev, who he hand-picked as his successor as president, would discuss candidates for the mayoral position. Moscow, Russia’s largest city, accounted for about 24 percent of the country’s gross domestic product in 2008, according to government data.
Eurobonds, Ruble
The yield on the city’s euro-denominated bonds due next October fell 32 basis points to 2.502 percent today, trading near a record low of 2.491 percent on April 21. Russia’s dollar bonds due in 2020 are yielding 4.485 percent, near the lowest since they were sold in April in the government’s first international bond offering since defaulting on $40 billion of domestic debt in 1998.
The ruble gained 0.4 percent to 30.3974 per dollar by 3:45 p.m. in Moscow, heading for its strongest close since Aug. 18. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, show the ruble at 30.6052 per dollar in three months, from 31.2238 a week ago.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 0.5 basis points to 163, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Bank of Moscow credit-default swaps rose 12 basis points to 442 points yesterday, the highest since Aug. 13.
Yield Spread
Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade rating, cost 1.5 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.
The yield spread on Russian bonds is 52 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries dropped 2 basis points to 236 today, according to JPMorgan EMBI+ indexes. The difference compares with 157 for debt of similarly rated Mexico and 210 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
The prospect of the city government withdrawing capital or support from the Bank of Moscow is unlikely in the wake of Luzhkov’s firing and Moody’s won’t be reviewing the lender’s credit rating, Yaroslav Sovgyra, a senior analyst with the credit ratings company, said by phone yesterday.
Credit Rating ‘Trigger’
Moody’s rates Bank of Moscow Baa1, three levels above non- investment grade and the same as Russia’s sovereign rating, with a negative outlook. The city of Moscow carries the same rating with a stable outlook.
“The ratings of the bank are not dependent on Mr. Luzhkov,” Sovgyra said. “The city will remain in control of Bank of Moscow.”
Should the new city administration withdraw its support for the bank it would “definitely” trigger a review of Bank of Moscow’s BBB- rating, the lowest investment grade, Alexander Danilov, an analyst at Fitch Ratings, said in a phone interview yesterday from Moscow.
“The change of mayor itself is not a factor,” Danilov said. Fitch rates the city of Moscow BBB, the same as the sovereign.
Luzhkov, who was first appointed mayor by then-President Boris Yeltsin in 1992, was the longest serving regional chief since the collapse of the Soviet Union. Medvedev has replaced at least three other senior leaders in the past year.
To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net
To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net
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