Russia Eurobonds Rebounding to Profit After Worst Slump on Global Recovery
Russia’s first Eurobonds since 1998 are rebounding from the worst loss among developing government securities sold this year, approaching their issue price as confidence in the global economic recovery builds.
The dollar bonds due 2020 rose 6.7 percent from a May 25 low to 98.335 cents today, the highest level since the April 22 sale at 99.363. In their first month, the notes fell 7.3 percent, the biggest decline among 22 dollar securities offered by emerging nations in 2010, according to data compiled by Bloomberg.
Russian debt jumped this month as the International Monetary Fund raised its forecast for global growth and reports showed a recovery in industrial output, employment and retail sales in the former Soviet nation. The country had returned to international markets for the first time since defaulting to raise $5.5 billion just before the Standard & Poor’s 500 Index began a 16 percent slump and oil, Russia’s biggest export earner, sank on concern that the global expansion would slow.
“If we see this positive sentiment continue I can easily imagine over the next two or three weeks that this bond trades above the 100 line,” said Bernhard Obenhuber, an emerging- market sovereign debt analyst at Credit Suisse Group AG’s private banking unit in Zurich. “This sovereign issuer has such a good credit quality, such a clean balance sheet compared to other emerging markets and of course compared to the western countries.”
Obenhuber said he’s been recommending for at least two weeks that clients buy Russia’s 3.625 percent bond due 2015, sold at the same time as the 5 percent 10-year note at 99.475 cents. The 2015 bonds, which gained 5.2 percent to 98.241 since May 25, rose for a fourth day today, advancing 0.1 percent. The 2020 bonds rose 0.3 percent and are up 1.1 percent this week, according to data compiled by Bloomberg.
Russia’s economy is set to expand 4.3 percent this year, according to the IMF, as oil recovers, climbing to $76.67 a barrel today from the year low of $68.01 in May. Industrial production rose for an eighth month in June, and real retail sales growth accelerated to 2.1 percent in May from 0.4 percent the month before. The unemployment rate dropped to 7.3 percent in May from 8.2 percent the previous month.
Russia, rated Baa1 by Moody’s Investors Service, the third- lowest investment grade, and BBB by Standard & Poor’s, the second-lowest, has public debt equivalent to 7.7 percent of gross domestic product. The debt level compares with the average of 106.7 percent for advanced nations in the Group of 20 and 39.6 percent for the G-20’s emerging market countries including China, India and Brazil, according data compiled by the Washington-based IMF.
“Emerging markets are now the world’s creditors,” said Tim McCarthy, who helps manage $1 billion in emerging-market assets at Valartis Group Asset Management in Geneva, including Russia’s 2020 bonds. He expects the price to rise above 100 cents and the cost of Russia credit default swaps to drop to levels last seen before the global credit crisis began in late 2008.
A deterioration in global risk sentiment or decline in oil prices could send Russian bond prices lower again, said Anton Hauser, fund manager in Vienna for Erste Sparinvest KAG.
“On a short-term basis, it’s mainly driven by global risk appetite,” Hauser said. “And oil prices are an obvious subject.”
Crude headed for a second weekly gain today as rising equity markets reinforced expectations demand for oil will grow. While crude was up 0.7 percent at 10:33 a.m. in London, it fell as low as $76.27 earlier in the session in reaction to a drop in manufacturing in New York and Pensylvania.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose 1 basis points to 255, more than the spread of 176 for debt of similarly rated Mexico and 226 for Brazil, which is rated two steps lower at Baa3 by Moody’s, according to JPMorgan Chase & Co.’s EMBI+ Indexes. The yield gap for Russian bonds is 57 basis points below the average for emerging markets, according to JPMorgan.
The ruble gained 0.2 percent to 30.4100 per dollar in Moscow today, extending a five-day winning streak, the longest in a month. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble at 30.6150 per dollar in three months.
The cost of protecting Russian debt against non-payment for five years with credit-default swaps was 169.54 basis points on July 14, near the lowest since May 18. The price is double the 84 basis points in June 2008.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Russia stayed out of international debt markets for more than a decade after its default and ruble devaluation in 1998 triggered a global markets selloff and the failure of the hedge fund Long Term Capital Management LLP. Rising oil revenue allowed the government to finance itself without borrowing overseas.
Prime Minister Vladimir Putin’s government raised funds from international investors after Russia suffered its worst economic slump since the 1991 collapse of the Soviet Union last year, creating a fiscal deficit the government forecasts will reach 5.4 percent of GDP in 2010.
Finance Minister Alexei Kudrin said the offering would help set a benchmark for Russian companies to sell debt by establishing benchmark yields. State-controlled lenders OAO Sberbank and Vnesheconombank are among companies that raised $4.6 billion from foreign currency bonds since the government’s sale.
The improved performance of the government’s bonds and global risk sentiment increase the likelihood of more international borrowing by Russia’s government this year, said Jerome Booth, who helps manage $32 billion in emerging market assets as head of research at Ashmore Investment Management Ltd. in London.
“What’s important to them is to enhance their credibility through their issuance program” and “keep the yield curve functional,” said Booth.
While Russia is considering selling its first ruble- denominated Eurobonds, it doesn’t plan another foreign currency sale, Deputy Finance Minister Dmitry Pankin said on July 9. Ruble-denominated bonds are less attractive to foreign investors because of a lack of liquidity in the local currency debt market, Booth said.
Finance Ministry spokesman Andrei Matveev in Moscow declined to comment.
Russian bonds are likely to gain, according to Ronald Schneider, who helps manage 700 million euros ($903 million) in fixed-income emerging-market assets at Raiffeisen Kapitalanlage GmbH in Vienna.
“To a large extent I would attribute the fall after the sale in April to over-optimism beforehand,” said Schneider. “There is a risk that Russia would be more exposed to a global slowdown than elsewhere, but apart from that I’m quite positive about their outlook.”