Putin's Ban on Turkish Turkeys Spells Peril for Best Bond Market

  • Sanctions may spur inflation, dim chance of rate reduction
  • Russia's local debt has handed investors a 21% return in `15

When Vladimir Putin banned Turkish tourism and food imports in retaliation for a downed Russian warplane, he probably didn’t plan to upset Russia’s rallying bond market.

The punitive measures threaten to exacerbate inflation already at four times the central bank’s target by making groceries more expensive. That could prompt policy makers to delay promised rate cuts for the third time in a row when they meet Dec. 11, according to Barclays Plc and Raiffeisenbank AO’s asset-management unit, a setback for a bond market that has produced the best returns worldwide in 2015.

“Since the Bank of Russia will now have to think of the future increase in the price of vegetables, Russia’s sanctions against Turkey have definitely changed investors’ outlook on the central bank’s key rate decision,” said Konstantin Artemov, who oversees the equivalent of about $444 million at Raiffeisen Capital in Moscow.

Investors who stuck with Russia through its isolation over the conflict in Ukraine, the collapse in the price of the nation’s biggest export, geopolitical risks from the war in Syria, and a ruble devaluation have been rewarded with returns of 21 percent this year on local-currency debt. That outpaced gains in all other sovereign bonds and compared with an average loss of 1.8 percent among developing-nation peers tracked by Bloomberg. Food inflation could be the turning point.

“It’s a new concern for us,” said Dmitri Barinov, who oversees about $2.6 billion of assets at Union Investment in Frankfurt. “Obviously it will slow down the disinflation process. Long-end bonds at yields below 10 percent look more vulnerable now for correction.”

Artemov said he’s also avoiding long-dated government bonds because he expects the central bank to delay easing through the first quarter of next year.

Russia’s February 2027 bond fell on Thursday, pushing the yield up by seven basis points to 9.59 percent by 5:59 p.m. in Moscow.

The sanctions on Turkey may increase the pace of price growth by as much as 0.4 percentage point between the end of the year and early 2016, according to the Bank of Russia. The central bank said the medium-term impact on inflation would be “insignificant,” according to a statement yesterday.

Turkeys, Tangerines

Putin banned Turkish goods including everything from turkeys and chicken to produce such as cucumbers, tomatoes, onions, and tangerines from Jan. 1, essentials that comprised about a quarter of Russia’s imports from the nation in 2014. The food restrictions came on top of travel limits that followed the shooting of the bomber on the Syrian border on Nov. 24, which the Russian president called a “treacherous stab in the back.”

Putin attacked Turkish leaders on Thursday in his annual state-of-the-nation address to parliament, saying “only Allah knows why they did it.” Turkey is making money from Islamic State’s illegal oil sales, Putin said.

The spat may end up foiling the Bank of Russia’s pledge to dial back last year’s emergency rate increase by forcing it to end the year with the rate at 11 percent, half a percentage point higher than before the central bank moved to arrest a freefall in the ruble in December 2014.

After predicting a cut of 50 basis points, Barclays analyst Daniel Hewitt now expects no change. Tensions with Turkey and the possible impact on Russia inflation “will be a factor in monetary policy decisions,” he said in a note on Nov. 30.

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