Russia is much better armored against financial attack than four years ago. Russian companies, cut off from Western lending after 2014, have slashed foreign liabilities by some $250 billion, says Jan Dehn, head of research at emerging markets specialist Ashmore Investment. The ruble has lost nearly half its value since then, swelling the coffers of commodity exporters who earn in dollars. Oil prices are firming rather than plunging, as they were in the second half of 2014. Aggressive central bank action has cut inflation to post-Soviet lows around 2.5%. “Russia is in a dramatically stronger position than in 2014,” Dehn says. “They’ve weaned themselves off foreign financing so much they’re basically immune.”
Investors should be on more solid ground with Russian sovereign bonds, which ironically seem better protected than private companies from sanctions provoked by actions of the Russian state. Limiting the trade in another nation’s obligations has a nuclear-option quality that makes deployment highly unlikely, says William Courtney, who formerly headed the National Security Council’s Russia team and who is now a RAND fellow. “The U.S. Treasury and Secretary [Steven] Mnuchin have made it clear that sanctions on sovereign debt can have unintended consequences for bond markets,” he says.
That leaves the underlying credit story, which is that Putin has been obsessed with macroeconomic probity since his scarring experience renegotiating Russia’s Soviet-era debt in the early 2000s. If the Kremlin didn’t default in 2014, it won’t default now. Yet yields on its Eurobonds are in the 5.2% range—about the same as those of its less-proven ex-subject, Azerbaijan—while ruble bonds known as OFZs pay around 7.5%. Ashmore’s Dehn recommends a bet on these, given the support the ruble should get from rising oil abroad and vanishing inflation at home. Servicing on overall Russian debt (see table) will decline in the next year or so.
Buying emerging market bonds isn’t straightforward for retail investors. But Moscow-based Da Vinci Capital launched a London-based exchange-traded fund in February, the ITI Funds Russia-Focused USD Eurobond UCITS fund (RUSB).
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