Sunday, 15 November 2009

Moscow bullish on bonds

Russia's return to the debt market for the first time in a decade got a positive reaction from investors who appear ready to forgive and forget the 1998 default that sent stocks crashing.
A high profile delegation led by Finance Minister Alexei Kudrin arrived in London last week seeking to persuade the City that their cash was safe in the government's hands.
We think that currently the assessment of risk in Russia is elevated so this ... conversation ... is important," Reuters reported a source in the delegation as saying.
Investors have warmed to the idea after prudent measures allowed the country to build up a stockpile of foreign currency and two reserve funds, decreasing the risk of default.
"Russia has a considerable amount of foreign reserves, around $400 million, so just on that basis it is very unlikely Russia will be unable to pay their creditors," said Tom Mundy, equities analyst at Renaissance Capital.
The main danger to sovereign debt remains the oil price, with a large proportion of the government's budget inflows coming from crude. However, a conservative estimate of $58 per barrel for 2010 from the government is well below Friday's close of $77.4.
"Our forecast is $85 [a barrel] next year, gradually rising to $110 by 2012 so given this trajectory, Russia's debt doesn't really look risky given the reserves," said Alexandra Yevtifyeva, chief economist at VTB Capital.
Many investors wrote off Russia as a safe bet following the 1998 default, saying they would never invest here again, but opinion turned around thanks to the ballooning oil price.
"Russia has moved beyond the stage of being a pariah on the international debt market, we're a long way past 1998," said Mundy.
Investment bank Troika Dialog said in a note two weeks ago that the bonds were only likely to raise $5 billion to $7 billion rather than the $18 billion the government was planning to place, but other analysts see no reason the placing won't be popular.
"From talking to investors, there is appetite for Russian sovereign risk," said Yevtifyeva.
A successful bond issue would ease the strain on the budget deficit, which President Dmitry Medvedev said would hit 7.5 per cent this year, while also injecting money into the ailing Russian economy.
In addition to the newly created demand the bonds could also provide a boost to Russian firms.
"If the placement goes well, it sets a benchmark for Russia on an international level, so for any Russian corporate looking to borrow on the international debt market they can work from the benchmark," said Mundy.

No comments: