Bernanke Damage Limited With Few Inflows to Lose: Russia CreditScott Rose and Olga Tanas
Russia is poised to suffer less than its emerging-market peers from Ben S. Bernanke’s plan to halt the Federal Reserve’s unprecedented quantitative easing program because most of the hot money it created went elsewhere.
Russia’s 10-year ruble bond yields climbed 29 basis points yesterday to 7.71 percent, the most in eight months. That compares with a 40 basis-point increase for 10-year debt of Poland, a 24 point jump for Brazil and 85 points for Turkey, according to data compiled by Bloomberg.
“There’s practically no hot money in our capital markets,” Deputy Finance Minister Alexei Moiseev said yesterday in an interview at the St. Petersburg International Economic Forum. “This has impacted our valuations, but it’s also kept a bubble from forming that could burst.”
The world’s largest energy exporter hasn’t had a year of net capital inflows since 2007 and the economy, starved of investment, has slowed to the weakest pace since a contraction four years ago. President Vladimir Putin’s government only made its ruble debt directly available to non-Russians through systems including Euroclear Bank SA this year, while corporate debt and shares are still restricted.
The Fed will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the world’s largest economy performs in line with its projections, Bernanke told reporters June 19 in Washington after a two-day meeting of the Federal Open Market Committee.
Portfolio inflows into Russia between the second quarter of 2009 and the end of last year were about 1 percent of gross domestic product, compared with 7 percent in Brazil, 10 percent in Turkey and Mexico and 16 percent in Poland, Morgan Stanley said in a June 13 research report.
“The positioning in Russia is less stretched than in some other markets, like Mexico, so it actually might outperform,” Viktor Szabo, who helps oversee $12 billion in emerging-market assets at Aberdeen Investment Management Ltd. in London, said by e-mail. “Russian rates have not come down as aggressively as in most emerging-market countries, that also helps.”
Russia’s central bank has kept its main lending rates unchanged for nine months following a quarter-point increase in September, while also lowering some less-used borrowing costs at the last three meetings.
Three-month borrowing costs may drop 11 basis points to 6.92 percent over the next three months, according to forward-rate agreements tracked by Bloomberg.
United Co. Rusal, the world’s largest aluminum producer, also downplayed concerns that the scaled-back monetary easing from the Fed would hurt Russian borrowers.
“The overall effect should be neutral,” Vladislav Soloviev, first deputy chief executive officer of Rusal, said in an interview in St. Petersburg. “The money supply has already been so large that its decrease shouldn’t have a major impact on borrowing costs.”
Still, there have been some signs of discomfort since the Fed first said it may trim its monetary-stimulus measures.
Outflows from Russian equity funds in the week to June 12 were $524 million, the most since October 2011 and the biggest exodus among emerging markets alongside Brazil, according to a June 14 note from OAO Sberbank, citing EPFR Global data.
Winding down QE will worsen conditions for borrowers in Russia, said Andrey Kostin, chief executive officer of VTB Group, Russia’s second-largest lender.
“The concern is that monetary policy becomes tighter, it will immediately be reflected in funding costs and on demand not only in Western countries, but naturally also in developing markets,” Kostin told reporters in St. Petersburg yesterday. “There could be a squeeze that will seriously affect banks and business in general. That’s a concern.”
The ruble slid for a fourth day against the dollar yesterday, depreciating 1.8 percent to 33.0460, the weakest since July 10, 2012. The currency gained 0.7 percent to 32.82 as of 2:22 p.m. in Moscow. The yield on Russia’s dollar bond due April 2042 jumped 39 basis points to 5.43 percent, yesterday, the highest in a year. The yield was down three basis points today.
The extra yield investors demand to hold Russia’s debt rather than U.S. Treasuries was unchanged today at 247, compared with 228 for debt of Mexico, according to JPMorgan Chase & Co. indexes. Ruble bonds have declined 1.6 percent this quarter, compared with a 3.8 percent return for India’s securities and a 0.1 percent drop for China’s, according to JPMorgan.
“Rumors over the past two weeks that QE would be halted led to a significant destabilization on global markets, which also had an impact on Russia,” Ksenia Yudaeva, head of the Kremlin’s expert department, said in an interview in St. Petersburg. “Looking purely objectively at the ruble, Russian assets haven’t been a major destination in the search for yield.”