Vanguard Hunts for Modest Opportunity in Russian Corporate Bonds

  • Privatfonds bought Lukoil, Norilsk Nickel debt last week
  • Lemco says Russia is `resilient' amid market turmoil

Russia’s investment-grade corporate bonds may still offer value versus comparably rated securities elsewhere amid a market-leading rally, according to Vanguard Group Inc., the world’s biggest mutual-fund company.

“If it appears Russian bonds are cheap relative to triple-Bs, then for us that may be a modest opportunity,” Jonathan Lemco, a senior sovereign-debt analyst at Malvern, Pennsylvania-based Vanguard, which oversees $3.3 trillion in assets, said Friday by telephone. He declined to discuss specific strategies or possible targets. “If the reasons they are cheap are not for fundamental grounds, then we may dip our toe in.”

Lukoil versus MOL
Lukoil versus MOL

Lukoil PJSC, the nation’s second-biggest crude producer, and miner GMK Norilsk Nickel PJSC carry two investment-grade rankings, one more than the sovereign, according to data compiled by Bloomberg. The bonds of both companies fell last week after the government proposed boosting taxes on oil exporters.

Brent crude oil has tumbled 50 percent in the past 12 months, while nickel has slumped more than 40 percent, helping to drive the country into its first recession since 2009. At the same time, sanctions slapped on Russia because of Vladimir Putin’s annexation of Crimea last year are blocking many of its companies from international capital markets.

Highest Yields

For Sergey Dergachev, who helps oversee $13 billion of emerging-market debt as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt, selling pressure from external forces such as Brazil’s economic woes and commodity weakness is a chance to boost his holdings in Russia’s strongest exporters.

“It has not changed my view on Russian credit positioning,” Dergachev said by e-mail Friday, when he bought bonds of Lukoil and Norilsk Nickel. Lukoil bonds cheapened along with those of Gazprom PJSC last week. Lukoil’s $1.5 billion of notes due April 2023 dropped to 89 cents on the dollar from 90 while Gazprom’s $1.3 billion issue due March 2022 fell to a price of 98 cents from 100 at the start of the week. They were both little changed today.

Russia’s investment-grade companies offer among the highest yields in a Bank of America Merrill Lynch index of BBB rated emerging-market peers. At 5.7 percent, the yield is surpassed only by Kazakhstan and Brazil. They have earned 19 percent this year, trailing Ukraine among emerging markets in an index compiled by Bloomberg.

“Russia remains extremely resilient,” Lemco said. “It has been an adequate performer in rather adverse circumstances.”

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