Barclays Downgrades Unconvinced by Putin Rally: Russia Credit
Barclays cut its recommendation on the securities yesterday to underweight, citing risks from the threat of sanctions after Ukraine said its Crimea region had been taken over by Russian forces. The extra yield on Russia’s dollar bonds over Treasuries dropped 22 basis points in the last two days to 266 at 3:23 p.m. in Moscow, following a 44 basis-point increase on March 3, JPMorgan Chase & Co. indexes show.
Bank Rossii raised interest rates two days ago to shore up the ruble amid a selloff in the country’s assets. The threat of an escalation in the conflict subsided yesterday when President Vladimir Putin said there was no need to send troops into eastern Ukraine yet to protect ethnic Russians.
“To count on a rally in a situation of political instability, slowing economic growth, accelerating inflation and the lack of understanding how the central bank will act, is rather premature,” Leonid Ignatyev, head of fixed-income research at BCS Financial Group in Moscow, said by phone. “We’re in an utterly unpredictable state.”
Putin’s government is struggling to stimulate economic growth, which decelerated to 1.3 percent last year, the weakest pace since a contraction in 2009. Consumer-price growth has exceeded policy makers’ targets for 17 months and the central bank is seeking to keep the rate, which was at 6.2 percent in February, to no more than 5 percent in 2014.
The spread between Russian dollar notes and Treasuries stood at 208 basis points seven weeks ago. The increase since then compares with an eight basis-point drop for Brazil, JPMorgan indexes show.
The Finance Ministry canceled government bond auctions scheduled to take place today, citing “unfavorable market conditions” in a statement on its website. The elevated volatility on the Russian debt market is “temporary” and unjustified given the nation’s credit quality and macroeconomic conditions, the ministry said.
The cancellation was the fourth since late January amid waning appetite for developing-nation assets after the U.S. Federal Reserve started to withdraw monetary stimulus.
The ruble has dropped about 9 percent since the start of the year against the dollar, the worst performance among 24 emerging-market currencies tracked by Bloomberg after Argentina’s peso. The currency is little changed versus the greenback today at 36.0750 after a 1.2 percent rally yesterday.
“A 10 percent weakening of the ruble may lead to a balanced budget this year so that it only needs money for refinancing,” Olga Sterina, an analyst at ZAO UralSib Capital in Moscow, said in e-mailed comments yesterday. “At such yields, the Finance Ministry doesn’t need the money.”
The yield on Russia’s ruble bonds due February 2027 surged 52 basis points on March 3 to 8.88 percent, the highest level since June 2012. It declined 10 basis points today to 8.61 percent.
Russia may balance its budget this year, Finance Minister Anton Siluanov said on Feb. 21. Earlier the ministry forecast a deficit equivalent to 0.5 percent of gross domestic product.
The government plans to borrow 808 billion rubles ($22 billion) on the local bond market in 2014, including 275 billion rubles in the first quarter, according to data on the Finance Ministry’s website. The ministry has sold 37.7 billion rubles of bonds since the start of the year, the data show.
Russia would only need to borrow 286 billion rubles by the end of the year to cover the cost of servicing its debt, Sterina from Uralsib said.
The real yield, or the difference between the nominal yield and inflation, on the February 2027 bonds reached 268 basis points on March 3, the highest level since 2012. That prompted Alexey Tretyakov, who helps manage 460 million rubles at UK Aricapital in Moscow, to buy the notes.
“We started buying OFZs yesterday,” Tretyakov said in e-mailed comments. “At the same time, one shouldn’t probably expect sizeable growth right now. Sustainable growth from current levels is possible only when the central bank brings rates back to the Feb. 28 levels.”
Bank Rossii unexpectedly raised its policy rate on March 3 to 7 percent from 5.5 percent to stem the ruble’s decline. The regulator also switched to deciding the scale of its currency interventions on a day-to-day basis, it said.
Russia is rated Baa1, the third-lowest investment-grade category at Moody’s Investors Service. The yield on the government’s April 2042 dollar bonds declined 22 basis points to 5.92 percent yesterday.
U.S. sanctions such as travel and asset bans on Russian individuals and institutions are likely within days if Russia doesn’t de-escalate its actions in Ukraine and return its forces to barracks, according to U.S. officials traveling to Kiev with Secretary of State John Kerry, who spoke on condition they not be named because the penalties aren’t final.
Scope for sanctions “seems limited,” the Barclays analysts said. At the same time, “the consequences of the related deterioration of foreign and local investor sentiment toward Russia could be severe,” they said.
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