Putin Counter Sanctions Drags Pension Funds to Bonds

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President Vladimir Putin’s government is pushing pension funds to buy more corporate bonds whether they like it or not. And many don’t.

In an effort to replace the foreign investment sapped by sanctions, Russia is guiding pension assets into companies’ bonds by halving the amount the funds can hold in banks. The reason managers say they’re stashing money in deposits is corporate bonds are just too risky for their retirement savers.

“We’re sure the state would save banks in case of emergency but we understand that it won’t be able to protect us from facing corporate defaults if the economic situation worsens,” Natalya Chuykova, who helps manage the equivalent of $1.3 billion of pension assets as a vice president at OAO Elektroenergetiki in Moscow, said by phone on Friday.

The reluctance from pension managers underscores wider caution about investing even in Russian companies untouched by U.S.-led sanctions as lower crude prices send the oil-export dependent economy into recession. Corporate yields soared as much as 9 percentage points amid the ruble’s collapse last year through January, before dropping by an average 5 percentage points this year, according to a bond index compiled by Uralsib Financial Corp. in Moscow.

The government is seeking to steer flows from private pension managers to help stimulate the economy after handing back about a third of the industry’s 1.5 trillion rubles ($25 billion) of assets in the second quarter. The money had been frozen for 18 months amid the economic crisis.

Ministry’s Letter

Russian companies should rely on funding from pension funds, rather than asking for the state for help, Interfax reported July 7, citing a meeting of OAO Russian Railways and pension funds chaired by Deputy Economy Minister Nikolay Podguzov.

The Finance Ministry said in a letter to pension funds it will investigate by the end of August what portion of the retirement assets returned to private pension funds in May and June was invested in corporate bonds and stocks, RBC newswire reported July 21.

The funds’ investments in banks -- whether deposits, bonds or shares -- will be capped at 40 percent from 2016, compared with 80 percent at the beginning of this year, under central-bank regulations.

Junk Ratings

One problem with the corporate-bond market, say pension-fund managers, is that the best quality companies aren’t issuing. About 40 percent of the 323 billion rubles of bonds sold in May and June were from companies with junk credit ratings below the minimum required level for pension funds of BB-. About half of the bonds were issued by banks, according to Denis Poryvay, an analyst at AO Raiffeisenbank in Moscow.

The amount of new ruble issues from start of May though last week declined to 459 billion rubles compared with 482 billion rubles last year, data compiled by Bloomberg show.

While pension funds would be eager buyers of infrastructure bonds, the market has yet to develop to the level where money managers can have confidence in a “clear and guaranteed cash flow,” Nikolay Sidorov, the chief executive officer for JSC Future private pension fund in Moscow, a unit of O1 Group, said by e-mail earlier this month.

“At the moment, it’s wrong to invest in the financial market,” Evgeny Yakushev, the chairman of JSC European Pension Fund, which manages the equivalent of $1 billion in assets, said in an interview in Moscow earlier this month. “It’s better to wait it out in assets that won’t fall much due to the fluctuations.”

For more, read this QuickTake: Financial War

(Corrects percentage figure in ninth paragraph of story published July 28.)
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