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Yields Sink to Four-Month Low to Emerging Europe: Russia Credit

Yields on Russian government bonds are falling to the lowest level in almost four months compared with developing nations in Europe as rallying oil prices boost confidence in the world’s largest energy exporter.

Russian yields dropped 20 basis points, or 0.2 percentage point, in the past month to an average of 4.92 percent, according to JPMorgan Chase & Co.’s EMBI+ Index. The yield is 21 basis points below the average of 5.15 percent for emerging European countries including Poland, Turkey and Ukraine. Russia’s yield was 10 basis points higher two months ago.

Borrowing costs are declining for Prime Minister Vladimir Putin’s government after a 14 percent jump in crude oil in the fourth quarter, the biggest advance in 18 months, sent prices above $90 a barrel. Oil and gas accounted for 46 percent of budget revenue in the first 11 months of last year, according to the latest data available from the Finance Ministry.

“Russian credit has always been deeply affected by the oil price,” said Kieran Curtis, who helps manage about $2 billion in emerging-market debt at Aviva Investors in London. Russia is also benefiting from being “less correlated with core Europe” at a time when investors are concerned that more European countries may need bailouts, he said.

Rising oil prices are helping to improve Russia’s economic outlook. The budget deficit may shrink to 3 percent of gross domestic product in 2011, Finance Minister Alexei Kudrin said in a Dec. 29 interview with Rossiya 24. The government targets a deficit of 3.6 percent of GDP this year. The shortfall in 2010 probably reached 4.1 percent to 4.2 percent, Kudrin told reporters the same day.

Bond Sales

The drop in yields will help Russia as it plans to borrow the most on record this year. Plans include tripling domestic bond sales to 1.74 trillion rubles ($57.5 billion) and selling $7 billion of foreign-currency bonds, according to statements on the Finance Ministry website on Dec. 29.

The cost to protect Russian government debt using credit-default swaps has tumbled to the cheapest level since September relative to emerging-market countries in eastern Europe, the Middle East and Africa. Russian credit-default swaps were unchanged at 139 basis points yesterday, 64 basis points less than the Markit iTraxx SovX CEEMEA Index of eastern Europe, Middle East and Africa credit-default swaps. The discount widened to 66 points on Jan. 6, the biggest gap since Sept. 23, according to data compiled by CMA.

Russian credit-default swaps have declined from as high as 1,116.7 in October 2008, after the collapse of Lehman Brothers Holdings Inc. triggered the global financial crisis. The government issued more than 2 trillion rubles in emergency loans to banks to help the domestic financial industry, Putin told an investment forum in Sochi last September.

Brazil Swaps

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The contracts are four times more expensive than the all-time low of 37 basis points reached in June 2007. Contracts for Russia, rated Baa1 by Moody’s, its third-lowest investment-grade rating, are 34 basis points higher than for Brazil, which is ranked two steps lower at Baa3.

“This year the global economy will do quite well and grow quite strongly and in this environment, while we don’t expect a big spread narrowing, Russian debt will do okay, helped by oil,” said Anton Hauser, a fund manager who helps manage 1.4 billion euros ($1.8 billion) of emerging-market debt at Erste Sparinvest, part of Austria’s largest bank, in Vienna.

‘Kind of Cheap’

Russian credit-default swaps cost 0.2 basis points less than contracts for Turkey, which is rated four levels lower at Ba2. That’s a turnaround from November and December when Russian swaps cost more than Turkey, with the gap widening to 21 basis points on Nov. 29.

“Spreads are still kind of cheap to the rating so it’s still okay value,” said Curtis at Aviva.

The yield spread on Russian bonds is 45 basis points below the average for emerging markets, twice the discount six weeks ago, according to JPMorgan Chase & Co.’s EMBI+ indexes.

Gains in Russia’s dollar bonds due in 2020 pushed the yield 3 basis points lower yesterday to 4.957 percent. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 1 basis points to 188, according to JPMorgan indexes. The difference compares with 122 for debt of similarly rated Mexico and 164 for Brazil.

The ruble, which is managed by the central bank against a dollar-euro basket to limit swings, rose 0.4 percent to 30.1140 per dollar at 12:19 p.m. in Moscow, its strongest level since Oct. 14. Non-deliverable forwards, which provide a guide to expectations of currency movements and interest-rate differentials, show the ruble weakening to 30.3453 per dollar in three months.


Russia has benefited from its relative lack of economic dependence on the euro zone compared with other eastern European countries in the CEEMEA Index, Curtis said.

Russia’s dependence on oil for economic growth makes the country vulnerable to declines in energy prices, said Luis Costa, an emerging-markets credit analyst at Citigroup Inc. in London. Credit-default swaps jumped 47 basis points between Nov. 4 and Nov. 30 as the oil price tumbled by as much as $7 a barrel.

“If we see a collapse in the hydrocarbon prices we have a serious problem here,” Costa said.

Russian corporate debt has also been rallying. The yield on July 2014 bonds sold by OAO Gazprom, the world’s largest natural gas producer, dropped to 4.025 percent from 4.65 percent on Nov. 30. The yield on June 2022 bonds sold by OAO Lukoil, Russia’s second-largest oil producer, fell to 6.205 percent from 6.7 percent in the same period.

“The credit metrics of the main Russian companies and of the Russian banking system are very acceptable even compared to developed countries, and government debt level is low,” said Marina Vlasenko, a credit analyst at Commerzbank AG in London. “Russia is looking very stable as a credit.”

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