Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Russia was one of the best trades of 2016 by a country mile. A strengthening ruble supercharged foreign interest in domestic Russian government bonds, pushing yields down to around 8 percent from 12 percent in mid-2015. Contrary to appearances, there's still some room to run. 

There's a realistic chance that inflation will cool to the Russian central bank's 4 percent target. That equates to an inflation-adjusted real return of about 4 percent for holding Russian debt -- a rare sight for most bond markets.

It's also a green light for more interest-rate cuts, which would drive further gains. After two reductions last year left the central bank benchmark at 10 percent, more rate cuts are surely on the way.  

Big Russian Rally
Bond holders have seen massive gains from the dark days around early 2015
Source: Bloomberg

A lot hinges on what President Donald Trump has in store. It's worth noting that even before the U.S. election, sanctions didn't deter foreign money. Offshore holdings of Russian government bond debt rose 50 percent last year to 1.45 trillion rubles ($24.5 billion), about a quarter of the total outstanding. That could climb further, if the new administration clears the way for U.S. sanctions to be lifted ahead of the March 2018 deadline.

Russia's Room to Grow
About 25% of Russian bonds are in foreign hands, a smaller share than seen for other European countries
Source: Central Bank of Russia, Bruegel database of sovereign bond holdings
As of June 2016

It's not certain when or even whether that will happen -- there's plenty of mood music they might go, though Treasury secretary nominee Steven Mnuchin said at his confirmation hearing that restrictions should remain in place for now.

Either way, clearly Russia's expecting some progress here, as the deputy economy minister substantially raised his expectations for privatizations this year to 500 billion rubles. Candidates include a 10.9 percent stake sale in VTB Bank PSJC, Russia's second-largest bank, and IPOs in Russian railways and the Novorossiysk commercial sea port.  These will surely be priced to attract foreign interest, and that could stoke enthusiasm for other Russian investments. 

That's not the only reason for optimism.  Fitch already rates Russia investment grade at BBB-, and there's a reasonable chance Standard & Poor's could lift its grade from junk status (Moody's Investors Service has a bigger hurdle as it has a negative outlook). Any move would open the doors for many more funds to invest. 

Trump isn't the only wildcard. The currency's substantial pickup may threaten to snuff out the recent economic turnaround, and this has led to a new government policy to control ruble volatility: Officials will shift all oil revenue above the budget base case of $40 per barrel of Urals crude from further spending to reducing the deficit through foreign currency purchases. Interventions won't exceed the additional oil revenues, and if crude fails to maintain current levels then this tool neatly falls away.

The Crude Effect on Russia
As oil has recovered so has the ruble
Source: Bloomberg

Details on this mechanism could come as soon as this week, but already the prospect of a renewed attempt at currency intervention has seen JPMorgan Chase & Co. analysts reduce their recommendation for Russian local bonds and currency from overweight to medium-weight, as a weaker ruble weighs against central bank rate cuts. Morgan Stanley also favors reducing foreign exchange exposure.

This still does not preclude further, though perhaps more modest bond gains. If the policy works, a more stable ruble has its benefits for investors, something that JPMorgan analysts recognize. And a policy miss that propels the ruble stronger bolsters the outlook for fixed income.

As ever, the volatility of the oil price hangs in the background. As the world's biggest energy exporter, Russia needs the OPEC deal on production cuts to hold -- its economy and inflation rate got hammered by the recent oil slump, and the latest price stabilization isn't written in stone. From this perspective, some heft to the country's bond yields makes sense. But while a march to sub-zero rates isn't on the cards, neither does the party have to be over.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Marcus Ashworth in London at

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Jennifer Ryan at