Ruble Cracks Seen Before Ukraine’s Deadly Descent: Russia Credit

Foreign investor holdings of Russian ruble government bonds slid to the lowest level in 10 months in December as the ruble capped its worst year since 2008 and political tensions in neighboring Ukraine were growing.

Non-residents’ share of ruble debt fell one percentage point from the previous month to 23.9 percent as of Jan. 1, central bank data data published Feb. 21 show. That represented outflows of 17 billion rubles ($477 million) to 894 billion rubles. Foreign holdings of OFZ securities peaked at 28.1 percent on May 1, according to the figures.

The ruble slumped 8 percent against the dollar last year as emerging-market assets were roiled by prospects of Federal Reserve tapering. The declines deepened in January as a three-month political standoff in Ukraine turned violent, with at least 82 protesters and police killed last week. Opposition leaders joined President Viktor Yanukovych in signing a peace accord on Feb. 21.

International investors will “continue to leave little by little,” Konstantin Artemov, a money manager at Raiffeisen Capital in Moscow, said by e-mail Feb. 21. “It’s a question of the ruble and market confidence.”

Bond Returns

Russian bonds lost 1.6 percent this year, while Brazilian debt returned 1.6 percent, according to Bank of America Merrill Lynch indexes. The ruble weakened 7.6 percent this year against the dollar, the worst performance among 24 emerging-countries currencies tracked by Bloomberg after Argentine’s peso.

Bond yields soared this year, with the January 2028 rate reaching a record, as the clashes in Ukraine compounded the fallout of the Fed’s reduction in asset purchases and a slowdown in Chinese economic growth. After canceling sales on two occasions this year, the Finance Ministry voided auctions on Feb. 19 saying bids failed to adequately reflect the credit quality of the securities on offer.

Russia opened its government debt market last year to direct foreign settlement through Euroclear Bank SA and Clearstream International SA. About a third of the government market was held by foreigners at the end of last year, Finance Minister Anton Siluanov said in Hong Kong on Feb. 21. He didn’t state the source of his figures and the ministry didn’t respond to an e-mailed request for clarification.

“The results of the end of last year and the beginning of this year show that foreign investors aren’t leaving our market and as a rule have not left,” Siluanov said.

Previous Peak

The holdings of non-residents are probably concentrated in longer-dated securities, according to Dmitry Kosmodemiyanskiy, a money manager at Otkritie Asset Management in Moscow. The share of foreigners will rise again, though it may not reach the previous peak of around 30 percent, he said by e-mail.

“I am waiting for a reversal in the ruble,” Kosmodemiyanskiy said Feb. 21. “OFZ prices should then reverse too and more people will enter the market.”

Russia is rated Baa1, the third-lowest investment grade at Moody’s Investors Service. The yield on the government’s April 2020 dollar bonds fell four basis points, or 0.04 percentage point, last week to 3.71 percent on Feb. 21. The ruble strengthened 0.8 percent that day to 35.4890 per dollar, while the yield on the February 2027 OFZ dropped eight basis points to 8.38 percent. The ruble weakened 0.4 percent to 35.6115 as of 4:18 p.m. in Moscow today.

While the ruble will stabilize soon, a 10 percent drop in the currency may add about 1 percentage point to the inflation rate, Finance Minister Siluanov said. The central bank is targeting consumer-price growth of 5 percent this year after last year’s 6.5 percent rate exceeded the top end of its 2013 range by 50 basis points.

Given the risk-off feel in emerging markets last month, the ruble’s decline, higher bond yields and an absence of rate cuts, foreigner sales may “have doubled,” Leonid Ignatyev, an analyst at BCS Financial Group in Moscow, said by phone on Feb. 21.

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