Aviva to Norway Await EU Clarity as Bonds Slide: Russia Credit

The prospect that Russia’s state banks will be shut out of European bond markets is prompting some of the region’s biggest money managers to reassess their holdings, as it drives up borrowing costs at the lenders.

The yield on VTB Group’s dollar-denominated perpetual bonds jumped 36 basis points to 10.04 percent, taking the increase since the U.S. announced fresh Russian sanctions last week to 95 basis points. OAO Sberbank’s November 2019 euro security climbed 28 basis points to 4.57 percent, the highest since being sold last month.

European Union officials are weighing a ban on purchases of bonds or stocks sold by the country’s state-controlled banks, according to a proposal presented to member states. Aviva Investors Ltd. and Norway’s $890 billion sovereign wealth fund said they’re reviewing their assets in Russia should the penalties be adopted by a unanimous vote of EU leaders.

“A fundamental reassessment is required,” Aaron Grehan, a London-based fund manager who helps oversee $4.5 billion in emerging-market debt at Aviva, said by e-mail yesterday. “The situation has deteriorated rapidly and we are faced with the risk of further sanctions that could be significantly credit negative, but as important is the investor sentiment for Russian debt.”

Yields climbed today after Russia’s central bank unexpectedly raised its key interest rate 50 basis points to 8 percent. The yield on Russia’s 2027 bonds rose 13 basis points to 9.27 percent by 5:44 p.m. in Moscow. The ruble was 0.1 percent weaker versus the dollar at 35.0890 after falling 0.4 percent yesterday.

‘Bad Marriage’

While the yield on VTB’s perpetual bonds rose in the past week, the rate for emerging-market financial-industry peers was little changed, JPMorgan Chase & Co. indexes show.

Delegation chiefs from the 28 EU governments got a first look yesterday at a range of measures to curb Russia’s access to capital markets and energy-production technology.

“The market is right to pay attention to sanctions,” Jan Dehn, London-based head of research at Ashmore Group Plc, which has about $70 billion in emerging-market assets under management, said by e-mail yesterday. “Having said that, Europe and Russia are very closely integrated economically, in effect they are locked in a bad marriage. Meaningful sanctions by Europe against Russia would therefore likely backfire.”

‘Negative Implications’

Since the July 17 downing of Malaysia Airlines flight MH17 by a missile that the U.S. says was probably supplied by the Russian military, sentiment toward the nation’s assets has soured further. The government of Norway, which isn’t an EU member, said it’s ready to adjust its wealth-fund holdings to reflect the changing geopolitical climate.

Russia supplies about 30 percent of the EU’s natural gas, with the Russian share in gas imports as high as 75 percent in an arc of countries stretching from Estonia in the north through Austria and Greece in the south.

The tougher sanctions would have “little impact in the short run,” Viktor Szabo, a London-based money manager who helps oversee more than $13 billion in emerging-market debt at Aberdeen Asset Management Plc, said by e-mail.

In the longer run, sanctions would undermine the “already weak investor sentiment” and increase financing costs “with all its negative implications on the potential growth rate and later on reserves,” he said. Szabo said he’s underweight for all Russian assets.