Moscow Smog Curbs Bond Trading, Bankers Flee Capital

Russian women cover their faces to protect themselves
Russian women cover their faces to protect themselves from forest fire smog in central Moscow on August 6, 2010. Photographer: ALEXANDER NEMENOV/AFP/Getty Images

Record heat and drought in Russia are curbing stock and bond trading as bankers flee Moscow to escape acrid smoke from wildfires east of the capital.

Fixed-income trades dropped by as much as 25 percent in the past five days, according to Moscow-based investment bank IFC Metropol. Fewer sales of corporate bonds set the new issues market on course for its lowest third-quarter total since 2007, falling 26 percent from the same period last year, according to data compiled by Bloomberg. Transactions on the Micex and RTS exchanges are as much as 60 percent below typical August levels, according to Moscow-based broker Otkritie Securities Ltd.

Russia’s extreme summer weather has almost doubled Moscow’s normal death rate and caused wheat prices to soar as Prime Minister Vladimir Putin’s government declared states of emergency in 28 crop-producing regions. JPMorgan Chase & Co. and Alfa Bank cancelled daily research reports yesterday because of concerns for the health of staff, while Deutsche Bank AG said it had sent non-essential workers home and advised bankers with a remote connection not to come to the office.

“It is impossible to work in Moscow right now,” Semen Odintsov, head of debt syndication at IFC Metropol in Moscow, said in a phone interview. “Many traders are working shorter hours or taking vacations earlier than planned.”

More than 104,400 people flew out of Moscow on Aug. 8, topping the previous 2010 record of 101,000, according to the Federal Air Transportation Agency. On Aug. 7, 95,000 left the city by plane, 20 percent more than the year-earlier date, agency spokesman Sergei Izvolsky said by telephone yesterday.

Trading Opportunity

Reduced trading is providing profit opportunities, according to an Aug. 5 report by JPMorgan analyst Jonny Goulden. A rally in the government’s 10-year dollar debt reduced the extra yield investors demand to hold the notes rather than similar-maturity U.S. Treasuries to below the five-year spread for the first time on Aug. 3, according to Goulden.

The yield difference on 10-year notes was 190 basis points, or 1.90 percentage points, on Aug. 9, compared with 200 for five-year securities, according to data compiled by Bloomberg.

The relationship “makes little sense” and will probably reverse, Goulden wrote, citing the higher price of Russia’s 10-year credit default swaps relative to five-year swaps. The 10-year contracts traded at 167 basis points on Aug. 6, 12 basis points above five-year swaps, according to CMA. Relative valuations between Russia’s Eurobonds have “seemingly left for vacation,” he wrote.

Carbon Monoxide

Moscow set a daily heat record of 35.5 degrees Celsius (95.5 degrees Fahrenheit) yesterday, the seventh such record this month and the 19th of the summer, according to the city’s weather service. The city reached 38.2 degrees Celsius, the highest ever, on July 29. No rain is expected for at least the next week, and the temperature in Moscow may hit 38 degrees Celsius (100 degrees Fahrenheit) today, Rossiya-24 reported.

The heat and smoke caused the city’s death rate to increase to about 700 a day from 360 to 380 in normal conditions, Interfax reported, citing Andrei Seltsovsky, head of the city’s public health department. Carbon monoxide and suspended particulate matter in Moscow’s air is at least twice as high as acceptable levels, Yelena Lezina, a spokeswoman for the state environmental monitoring agency, told Rossiya 24.

Fire crews are battling 557 fires on 174,035 hectares (672 square miles), according to the Emergency Situations Ministry. So far this year, 747,722 hectares, an area about three times the size of Luxembourg, have burned, the ministry said in an e-mailed statement.

‘Stay Away’

Bond trading has dropped to 156 billion rubles ($5.2 billion) so far this month, from 1.12 trillion rubles during all of August last year, as some banks cut their working day, said IFC Metropol’s Odintsov.

Russian companies have sold 94.4 billion rubles of bonds since July 1, compared with 127.8 billion rubles in the same period last year, Bloomberg data show as of today.

Trading on the benchmark Micex Index of 30 stocks dropped to 21.6 billion rubles on Aug. 6, from 68.4 billion rubles on the same date last year, Bloomberg data show. The level was the lowest since July 9. Trading volumes rose to 26.4 billion rubles yesterday, the second-lowest so far this month. The Micex slipped 1.5 percent lower to 1,397.66 at the 6:45 p.m. close in Moscow trading, its lowest since July 30.

VTB Capital, Russia’s second-largest bank, has “several” Moscow-based bankers working from its London office, managing director Olga Podoinitsyna said in a phone interview.

“Bankers coming to Moscow for business have also been advised to stay away,” Deutsche Bank’s Moscow-based spokeswoman Marietta Nikolaeva said by phone.

‘Skeleton Crew’

Alfa Bank in Moscow cancelled its daily research notes until Aug. 12 as the office is operating on a “skeleton crew,” Isai Pochtar, an international sales manager, said in a phone interview while on vacation in Rochester, New York.

“There will be no daily until further notice because of the severe smog and health concerns,” Derick Pearlin, head of equity trading at JPMorgan in Moscow, said in a phone interview. “A lot of the guys are working out of different offices in the Baltics, Sweden, Germany and London. The traders are holding the fort in Moscow because of the need to keep the systems going.”

The ruble depreciated 0.5 percent to 30.0549 per dollar by the close of trading Moscow, its weakest closing level since Aug. 2. 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 30.2255 per dollar in three months, from 29.9338 a week ago

Default Swaps

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 1 basis point to 154.5 yesterday, its lowest level since May 13, 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.

Credit-default swap contracts for Russia, rated Baa1 by Moody’s Investors Service, its third lowest investment grade ranking, cost 4 basis points less than contracts for Turkey, which is ranked four levels lower. Turkey swaps cost 40 basis points more than Russia on April 20.

The extra yield investors demand to hold Russian debt rather than Treasuries rose 5 basis points to 213, rising from the lowest since May 13, according to JPMorgan EMBI+ Indexes. That compares with 131 for debt of similarly rated Mexico and 189 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

Air Conditioning

The so-called yield spread on Russian bonds is 55 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan Indexes.

The yield on ruble bonds sold by OAO Gazprom, Russia’s biggest company, is 258 basis points above the same-maturity Gazprom debt in dollars, data compiled by Bloomberg show. The spread narrowed to as little as 115 on June 14.

Not all of Moscow’s bankers are evacuating the city. Tom Mundy, a strategist at Renaissance Capital, said the brokerage has a full working office. Renaissance and Otkritie said some staff were working longer hours because their offices had air conditioning.

“Despite working and living conditions becoming more repressive by the day in Moscow,” Citigroup’s trading and sales staff is “on ground in full effect,” John Heisel, an equity sales trader at Citigroup Inc. in Moscow, said by phone yesterday.

Simon Fentham-Fletcher, Moscow-based head of investment management at ZAO Raiffeisenbank, the Russian unit of Austria’s Raiffeisen International Bank Holding AG, said his approach on office attendance is based on the visibility of a billboard on Leninsky Prospect, close to his office in Moscow.

“I judge the smoke on how well I can read the small print,” Fentham Fletcher said by email yesterday. “I am letting non-essential staff stay at home.”

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