Goldman Sees CDS Mismatch as Fed Distorts Risk: Russia Credit

Russia’s credit risk is lower than markets are pricing in because the world’s biggest energy exporter has strong earnings from oil sales and a low debt burden in its favor, according to Goldman Sachs Group Inc.

The contracts, which insure against a default, are 25 basis points more expensive than the average of 10 developing-nation peers and should trade at least on par, Clemens Grafe, an economist at Goldman Sachs in Moscow, said yesterday. Russia’s credit-default swaps climbed 44 basis points since May 22 to 180, compared with a 46-basis point increase to 176 for Brazil and an advance of 51 to 218 for South Africa, all ranked BBB at Standard & Poor’s and Fitch Ratings.

Investors probably haven’t taken into account Russia’s current account surplus, driven by energy exports, while other nations run deficits, Grafe said. Emerging-market credit default swaps climbed, indicating rising investor perceptions of risk, and bonds sold off after U.S. Federal Reserve Chairman Ben S. Bernanke signaled in May that quantitative easing could be pared amid signs of an improving U.S. economy.

“Russia is obviously the one that has the least problems on the external front,” Grafe said by phone yesterday. “The market has aligned Russia with the wrong part of the peer group. Russia certainly should outperform its peers in this environment.”

Oil Boost

Russia ran a current account surplus equivalent to 3 percent of gross domestic product at the end of the first quarter, data compiled by Bloomberg show. Brazil had a 3 percent deficit in the period, while South Africa ran a 5.8 percent shortfall. Russia has $510.8 billion of gold and foreign-currency reserves.

Crude jumped to $116.61 per barrel in London on Aug. 28, the highest since 2008, on concern a U.S. strike on Syria would lead to supply disruptions in the Middle East. The oil and natural gas industries contribute about 50 percent of Russia’s government revenue. U.S. Secretary of State John Kerry is due to meet counterpart Sergei Lavrov in Geneva today to discuss a Russian initiative to place Syria’s chemical weapons arsenal under international control.

“Historically Russia’s credit risk traded in line with the peer group average,” Grafe said. “It has the lowest external financial requirements out of all emerging markets with the exception probably of China.”

Auction Sell-out

Russia is “robust and protected” given only 4 percent of its foreign debt is due in the “short-term” and the total is equivalent to 31 percent of GDP, Morgan Stanley analysts wrote in a report dated June 13.

The Finance Ministry sold out two auctions of ruble bonds yesterday as the possibility of U.S. military action subsided, boosting investor appetite for riskier assets. Total demand for 11.6 billion rubles of 10-year notes it sold was almost 42 billion rubles at the top end of the provided guidance, the ministry said.

On Sept. 9, Russia sold the most foreign debt this year among emerging-market nations with a $7 billion placement in dollars and euros. Investor demand was more than double the amount offered, Andrey Solovyev, the head of debt capital markets at VTB Capital, which arranged the sale with five other banks, said Sept. 10.

Russia’s CDS spread needs to widen a further 15 basis points to be a tempting investment because of the country’s exposure to oil-price movements, Konstantin Artemov, who manages $500 million of fixed-income funds at Raiffeisen Capital in Moscow, said by phone.

Key Categories

The yield on Russia’s 2042 dollar notes dropped 10 basis points to 5.746 percent by 4:20 p.m. in Moscow. The extra yield investors demand to hold Russia’s dollar debt rather than Treasuries was unchanged at 239 compared with a gain of one basis point to 237 for Brazil, according to JPMorgan indexes.

Goldman’s analysts compared Russia against countries rated BBB on 11 macroeconomic, fiscal and structural criteria, which Fitch Ratings uses in its sovereign credit rating model. Russia ranked in the middle of the peer group based on all variables, and above average for key categories the market is focusing on, including external and fiscal balances, Grafe said.

“This mispricing will disappear in the next few months,” he said.

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