Erdogan Favored Over Putin at Deka Amid Sanctions: Turkey Credit

Some investors are so concerned about the repercussions for Russia should it annex Crimea that even Turkey, where the government is fighting street protests and allegations of corruption, looks like a better bet.

Peter Schottmueller, who manages the equivalent of $3 billion of assets including in emerging-markets, at Deka Investment GmbH in Frankfurt, is “short Russia and long Turkey,” he said yesterday by e-mail. Foreigners sold more than $216 million of Russian bonds in the past month, according to EPFR Global.

Investors are selling Russian assets as Crimea voted to leave Ukraine, paving the way for President Vladimir Putin to annex the Black Sea peninsula. The U.S. and European Union imposed sanctions on individuals yesterday amid the worst political standoff with Russia since the Cold War. The crisis has deflected attention from Turkey where Prime Minister Recep Tayyip Erdogan has decried efforts to embroil him in a graft probe as an attempted coup before March 30 local elections.

“Some investors have rotated out of Russian financials and corporates” into Turkish assets, Velihan Erdogdu, an emerging-markets corporates portfolio manager at BNP Paribas Investment Partners in London, said by e-mail yesterday. “Given the political noise due to the upcoming election season in Turkey, Latin American and Asian assets have benefited as well from flows out of Russia.”

Head Start

Turkey’s political crisis, which began on Dec. 17 when a corruption investigation targeting Erdogan’s government became public, peaked in the currency market on Jan. 27 as the lira sank to a record 2.39 per dollar. The currency has gained 2.8 percent since that day, while the ruble slumped 4.3 percent.

Yields on two-year Turkish notes are little changed this month at 11.23 percent as of 4:50 p.m. today in Istanbul, while those on equivalent-maturity Russian debt rose 1.2 percentage points to 8.14 percent. The cost to protect Turkish bonds using five-year credit-default swaps fell to 31 basis points below Russia last week, the biggest gap since September 2009.

The selloff in Russia accelerated in February as former Ukrainian President Viktor Yanukovych fled the country and pro-Russian forces took control of Crimea after months of escalating violence on the streets of Kiev.

Assets Frozen

“The volatility in Turkish markets started much earlier than in Russia and some investors put on trades favoring the ruble against lira,” Hakan Aksoy, who helps oversee $4.7 billion of emerging-market and high-yield debt at Pioneer Investments, said in e-mailed comments yesterday. “There could be unwinding of these trades favoring Turkey.”

Goldman Sachs Group Inc. said March 13 that capital outflows from Russia jumped 60 percent to almost $45 billion this year, compared with the first quarter of 2013. Turkey offers the second-highest yields on two-year local-currency bonds after Brazil among 20 developing nations tracked by Bloomberg. Russia ranks fourth.

EU foreign ministers agreed yesterday to freeze assets and impose visa travel bans on 21 Russians, Crimeans and former Ukrainian officials. U.S. measures were aimed at the wealth of Russia’s supporters, the White House said in a statement. While Western leaders left open the option of extending the sanctions, they kept more punitive steps in reserve.

Trade Ties

The EU’s first salvo of sanctions falls short of “additional and far-reaching consequences” the bloc floated on March 6, highlighting divisions within the EU over how close the blacklist should come to Putin’s inner circle to dissuade him from moving further into Ukraine without severing deep trade ties between Russia and the West.

Russian assets rallied yesterday. The yield on the nation’s 2023 dollar bond fell for the first time in nine days, dropping seven basis points to 5.58 percent, while the ruble strengthened 0.9 percent against Bank Rossii’s target basket of dollars and euros. The Micex Index of shares jumped 3.7 percent.

“If sanctions are placed onto certain individuals in Russia, Turkey is likely to benefit as the Russian oligarchs will try and get their money out of Russia into less well-monitored jurisdictions,” Max Wolman, who helps oversee more than $10 billion in emerging-market debt at Aberdeen Asset Management Plc in London, said by e-mail March 14.

Public support for Erdogan’s AKP party has faltered since the graft investigation, which implicated members of the premier’s cabinet. The prime minister’s approval rating fell to 44 percent last month, from more than 70 percent in 2011, according to Ankara-based MetroPOLL.

Frying Pan

“For many investors a swap into the Middle East and Turkey may be little more than going from the frying pan into the fire,” Nigel Rendell, a senior analyst at Medley Global Advisors, said by e-mail from London yesterday. “I follow Turkey closely and the sentiment is still negative.”

Foreign investors sold a net $957 million of Turkish bonds in the week ended March 7, the latest data available from the central bank in Ankara. That was the most since $1.2 billion in the period ended Feb. 7.

Turkey also has to compete with other emerging markets for cash leaving Russia. Indonesian bonds have returned 5.8 percent in the past three months, according to data compiled by Bloomberg. Egyptian debt earned 4.5 percent, India’s 3 percent and Mexico’s 2.9 percent.

While Turkey’s fortunes could turn as soon as political tensions die down, outflows from Russia may be harder to reverse, according to Deka’s Schottmueller. “Irrespective of sanctions, Russia’s long-term reputation as a reliable partner is damaged. Permanent capital flight will be a major issue for them.”

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