Euroclear Opens Ruble Debt to Foreigners, OFZs Pare Gains

Euroclear Bank SA said it will start direct settlement of Russia’s ruble-denominated government debt tomorrow, opening the $100 billion market to foreign investors. The so-called OFZs rallied the most in almost a month on the announcement before paring gains.

The liberalization, part of a plan to boost financial markets in the world’s largest energy supplier, will spur demand for OFZs and lower yields, making it more “comfortable” for the nation to borrow, First Deputy Central Bank chairman Alexei Ulyukayev told reporters in Moscow today after the announcement.

“Industry experts are predicting new foreign capital inflows to Russia in the region of $20 billion,” Euroclear Chairman Frederic Hannequart said in the statement. The company will start with over-the-counter operations and plans to offer exchange-traded transactions for the debt in March.

OFZ bonds maturing in February 2027 snapped seven days of declines, lowering the yield one basis point, or 0.01 percentage point, to 7.08 percent. The yield fell as low as 6.94 percent after the announcement and has declined 195 basis points in the last eight months in anticipation of the liberalization, initially expected by mid-2012.

“The Euroclear launch will boost liquidity, bring more investors to the market and improve Russia’s image,” Evgeny Shilenkov, head of debt sales at Veles Capital in Moscow, said by phone today. “We’re going to see a rally in OFZs.”

‘Artifical Fence’

Foreign investors will now have direct access to buying and selling the debt by opening accounts in Euroclear and sidestepping brokers and their fees. Access to municipal and corporate debt markets is set to follow “in the coming months,” according to today’s statement.

Russia’s debt market has been “behind an artificial fence that now will be dismantled,” Andrey Lifchits, who manages about $50 million of bonds at Spectrum Partners, said by phone from Cyprus on Jan. 30.

Clearstream International SA is at an “advanced stage” in establishing a direct link with Russia’s Central Settlement Depositary, spokeswoman Jessica Sicre said by e-mail today.

The ruble rebounded against the dollar after the announcement, climbing as much as 0.1 percent, before trading down 0.4 percent at 30.0800 by 7 p.m. in Moscow.

Foreign Holdings

Russia’s OFZ market, which was valued at 3.2 trillion rubles ($107 billion) at the end of 2012 by the Finance Ministry, is currently dominated by local banks. Non-residents hold about 6.5 percent of the debt, a fraction of the 17.6 percent foreigners hold in Turkey and 29.7 percent in Mexico, according to Finance Ministry and International Monetary Fund data. Non-residents held 36 percent of Polish domestic government bonds at the end of December, according to Finance Ministry data.

“Overall non-resident holdings of OFZ remained disproportionately low in comparison to other major emerging markets,” said Gintaras Shlizhyus, an analyst at Raiffeisen International, said in an e-mailed note Jan. 25 from Vienna. Shlizhyus said he expects net inflow into OFZs this year at about $15 billion.

“The most sophisticated investors” bought $5 billion to $7 billion of OFZs last year and the “residual” net inflow this year will probably be $10 billion to $13 billion, Sberbank CIB said in a research note Jan. 31.

Lifchits is more optimistic, saying inflows could reach $25 billion in the 12 months from the start of Euroclear operations. “By degree, this is comparable to the capital outflow from the country,” Lifchits said. Last year net capital outflow reached $56.8 billion.

Hotter Inflows

Sberbank CIB analysts led by Alexander Kudrin said Euroclear’s entry may cut the “fair-value yield” of OFZs by as much as 1 percentage point, according to the report.

That “could help the Finance Ministry place new paper more cheaply and save funds for debt servicing in the future,” Sberbank CIB said.

The flip side of Euroclear’s entry is that it opens the Russian market to more speculative, “hotter” inflows that can increase volatility, said Ruslan Tongiev, head of financial markets operations at Promsvyazbank in Moscow.

“For me, as a trader, that’s good,” Tongiev said. Western investors are very sensitive to any changes in the investment climate and tend to leave the market “all at once, rushing out the same door,” he said.

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