Russia Bonds Have Worst Rout in Year as Moody’s Warns on Economy

Russia’s Eurobonds headed for the longest stretch of weekly losses in a year as Moody’s Investors Service signaled the falling ruble is worsening the outlook for the nation’s credit rating.

Russia’s $3 billion of bonds due April 2042 fell for a fourth day, lifting the yield 10 basis points to 6.53 percent as of 5:19 p.m. in Moscow, the highest since March and an 18 basis-point increase in the past five days. The ruble advanced 0.2 percent against the dollar to 64.5920, paring its eighth weekly decline in a row, the longest streak since November.

After rebounding earlier in the year, the ruble is once again the worst performer in emerging markets with a 15 percent loss this quarter as concern China’s economy is losing steam pummels the price of oil, Russia’s key export. The currency slump means central bank Governor Elvira Nabiullina’s policy responses to the nation’s first recession since 2009 are narrowing, Moody’s said in a note dated Aug. 13.

“The fresh disruption in Russia’s foreign-exchange markets will complicate the central bank’s ability to keep lowering interest rates, despite the weak economy,” Moody’s analysts led by Kristin Lindow wrote in an e-mailed note. That’s “credit negative,” because it may postpone any economic recovery to next year, they said.

Russia’s gross domestic product shrank 4.6 percent in the second quarter, after a 2.2 percent contraction in the first three months of the year. The extension of European Union and U.S. sanctions and a 27 percent plunge since May in the price of crude oil signal a growing risk that the “worst of the recession is still ahead,” according to Moody’s, which downgraded Russia to Ba1, its highest junk rating, in February.

Default Swaps

The Bank of Russia has cut interest rates by 600 basis points this year to 11 percent. At their latest meeting on July 31, policy makers reduced benchmark borrowing costs by 50 basis points, the smallest amount this year, and removed a sentence on their readiness to lower rates further in an accompanying statement.

Credit default swaps on Russian debt rose to 368.29 points, the highest since April on closing basis. The Micex index of stocks increased by 0.5 percent to 1,711.96.

Brent crude, which is used to price Russia’s main export blend, dropped 0.5 percent to $49 a barrel, headed for the lowest level this week. Crude together with natural gas account for about 50 percent of state revenue. The budget deficit widened more than forecast in the first seven months, Finance Ministry data showed on Thursday.

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