Invesco Favors Putin Bonds Over Ukraine: Russia Credit

Banu Elizondo just made it out of Kiev in February as deadly protests gripping Ukraine’s capital toppled President Viktor Yanukovych. With violence in the nation raging three months on, she’s seeking shelter across the border in Russia for the money she helps manage at Invesco Ltd.

“We are much more comfortable playing this story on the Russian side” than in Ukraine, Elizondo, who is part of a team that oversees $2 billion in emerging-market debt, said in a phone interview from her Atlanta office on May 28.

While Ukraine’s dollar bonds have returned 12 percent since the ouster of Yanukovych on Feb. 22, more than four times the gains of Russian debt, the trend may reverse in the coming months, Elizondo said. Their fortunes could turn because of Russia’s low debt and “tremendous” foreign reserves, she said.

Invesco joins investors including Ashmore Group Plc in favoring Russian debt as the prospect of tougher sanctions from the U.S. and the European Union eases. President Vladimir Putin ordered his troops back from Ukraine’s border on May 19 to calm tension, as pro-Russian separatists battled with government forces over control of east Ukraine. Insurgents shot down a military helicopter amid fighting in Slovyansk yesterday, killing 13 troops and a general on board.

Inside Maidan

While Russia’s international reserves of $468 billion are within $2 billion of the lowest level in four years, the foreign reserve stockpile excluding gold is the fifth-highest in the world, data compiled by Bloomberg show.

Ukraine, surviving on a $17 billion lifeline from the International Monetary Fund after Petro Poroshenko’s election as president May 25, will struggle to reverse an economic slump and repair its banking industry amid the turmoil, Elizondo said. Invesco still owns Ukraine bonds, said Jack Deino, head of emerging-market fixed income-investments in Atlanta.

Elizondo said she visited Ukraine to meet politicians, IMF and central bank officials, ending up inside a trade-union building occupied by protesters in Maidan Square in central Kiev.

“I talked to those people and they admitted on the fifth floor there was some self-defense equipment -- that’s when I knew these people were determined to do anything,” said Elizondo, a senior money manager at Invesco, which has $750 billion under management. “Fast forward to today and Russian assets are the ones which suffered the most, versus Ukraine.”

That’s unjustified as “another leg of sanctions is pretty much off the table,” she said.

The yield on Ukraine’s April 2023 dollar notes fell to a two-month low of 8.77 percent this week, below the level that would compensate for the political and economic risks facing the nation, Elizondo said. The yield on Russia’s dollar bonds due in September 2023 fell to a six-month low of 4.4 percent.

No Turnaround

Invesco likes both Russia dollar- and ruble-denominated bonds, she said. The yield on benchmark ruble notes maturing in February 2027 traded at 8.79 percent yesterday, compared with 7.9 percent on Dec. 31. The ruble weakened 0.5 percent to 34.8450 versus the dollar as of 6:18 p.m. in Moscow. The Russian currency has slid 5.7 percent this year, the worst performance after Argentina’s peso among 24 emerging-market currencies tracked by Bloomberg.

Lars Christensen, the Copenhagen-based chief emerging-market analyst at Danske Bank A/S is less upbeat than Elizondo, warning of the risk of a recession in Russia.

“We don’t see any major turnaround for Russia this year, even if geopolitical tension eases,” Christensen wrote in an e-mailed report yesterday. Russia has a 50 percent probability of slipping into a recession in the next 12 months, according to the median forecast in a Bloomberg survey.

Demonstrators in Kiev are defying calls to vacate Maidan, protesting against unpunished acts of violence by the Yanukovych regime and corruption. In eastern Ukraine at least 55 people have died in fighting this week, triggering a demand from Russia’s foreign ministry yesterday for Kiev to withdraw troops from the mainly Russian-speaking regions.

“Too many unknowns” remain, Elizondo said. “I don’t think the saga is completely over yet.”

(Corrects to show Elizondo helps manage $2 billion in second paragraph, adds that Invesco holds Ukrainian bonds in paragraph six of story published May 30.)
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