The latest sanctions imposed on Russia by the U.S. over Ukraine are threatening to tip the nation into a recession as they exacerbate a bond selloff and drive credit risk higher.
Yesterday’s 36 basis-point jump in Russia’s August 2023 ruble bond, the most among 24 emerging markets monitored by Bloomberg, extended this month’s increase to 59 basis points. Credit default swaps insuring the nation’s debt against non-repayment climbed 26 basis points to a two-month high.
Bonds, stocks and the ruble tumbled after the U.S imposed the most aggressive sanctions yet on Russian companies to punish President Vladimir Putin for refusing to end his support for Ukrainian rebels. Restricting access to financing for companies including oil producer OAO Rosneft and OAO Gazprombank, the country’s third-biggest lender, will probably push the economy into a recession, said Riedel Research Group Inc. in New York.
“The sanctions have turned a bad situation worse, but things could get worse still,” Paul McNamara, London-based investment director at GAM U.K. Ltd., which manages $129 billion in assets including Russian debt, said by e-mail July 17. “For Russia to become attractive, you need some perspective that things are going to start getting better and neither on the politics nor the real economy does that look likely.” GAM isn’t selling its Russian holdings though doesn’t plan to buy more.
Ruble bonds have lost 4.1 percent in July, the steepest decline in emerging markets in dollar terms after Romania, according to data compiled by Bloomberg. The yield on the 2023 bond fell five basis points to 8.94 percent as of 4:42 p.m. in Moscow today. That compares with 8.07 percent for similarly rated South African 10-year debt.
Putin, speaking in Brazil yesterday, said the “aggressive” response to the four-month insurgency in eastern Ukraine will only have a “boomerang effect” that will hurt the U.S.’s own interests.
Andrey Kostin, head of state-run lender VTB Group, warned the measures may tip the economy into recession, lead to the “disintegration” of financing and turn Russia into an outcast of global capitalism.
The $2 trillion economy just skirted a recession with zero growth last quarter as capital markets seized up amid the growing international tension. Gross domestic product will expand 0.5 percent in 2014, according to the median estimate of 37 economists in a Bloomberg survey, eight of whom predict a contraction for this year.
The yield on OAO Rosneft’s 10-year note maturing in June 2022 climbed to the highest level in more than two months yesterday after the company appeared on the sanctions list released by the Obama administration. Bonds of OAO Novatek and OAO Gazprombank, which were also on the list, fell.
Even so, Rosneft and Novatek’s short-term refinancing risks are “low and, considering the active cooperation of both companies with China, the Asian markets may provide a new source of funding longer term,” Moscow-based BCS analysts, led by Leonid Ignatyev, said in an e-mailed note yesterday.
Low valuations may present a buying opportunity if the risk premium on Russian bonds increases further, according to Marcin Adamczyk, who helps manage $7.5 billion in emerging-market debt, including Russian bonds, at ING Investment Management in the Hague.
“Every fresh round of sanctions immediately increases the premium investors demand,” Adamczyk said by e-mail. “We don’t exclude the possibility of increasing our holding.”
Stocks in Europe and the U.S. declined yesterday after a Ukrainian Interior Ministry official said the rebels shot down a Malaysian jet over eastern Ukraine near its border with Russia. The Boeing 777 flight between Amsterdam and Kuala Lumpur was hit by a missile and went down near the eastern town of Torez, the official said.
The sanctions will prevent the targeted companies from accessing U.S. equity or debt markets for new financing with maturities longer than 90 days. They don’t otherwise prohibit U.S. companies or individuals from doing business with the Russian firms.
The EU said it will halt lending for new public-sector projects in Russia by the European Investment Bank, the bloc’s in-house lender, and will use its influence to stop new lending by the European Bank for Reconstruction and Development.
The sanctions “are likely to weigh on local debt further as the sanctioned companies will probably need to divert more funding to local currency,” Esther Law, who helps oversee about $8 billion of emerging-market debt for Pioneer Investments, said by e-mail on July 17. “We remain cautious.”