Russia 100414 Basic Political Developments

Bloomberg: Russia Debt Cut to 8-Year Low in Funds as Eurobond Sale Nears

http://www.businessweek.com/news/2010-04-13/russia-debt-cut-to-8-year-low-in-funds-as-eurobond-sale-nears.html
April 13, 2010, 6:29 PM EDT

By Michael Patterson and Denis Maternovsky

April 14 (Bloomberg) -- Emerging-market bond funds are holding the least Russian debt in at least eight years in a sign money managers are making room to buy the government’s first Eurobonds since 1998.

Developing-nation debt mutual funds reduced Russia to 8.82 percent of assets, according to the latest data available from EPFR Global for February reported on April 12. That’s down from 9.91 percent a year earlier and is the lowest since Cambridge, Massachusetts-based EPFR began tracking the average weightings in 2002. Funds may have reduced their allocation to make “room” for Russia’s new bonds, said Alexander Kozhemiakin, who oversees more than $4 billion as director for emerging-market strategies at Standish Mellon Asset Management in Boston.

“This deal is likely to do well,” he said.

Russia is returning to international capital markets for the first time since defaulting on $40 billion of domestic debt in 1998. Government officials including Deputy Finance Minister Dmitry Pankin met with investors in Germany yesterday and London and Singapore today at the start of a week-long tour.

The government led by President Dmitry Medvedev has said it plans to borrow as much as $17.8 billion abroad this year and is selling at a time when yields on emerging-market debt are near all-time lows on confidence in the economic recovery and record- low global interest rates.

Lower Yield

Russia may sell $10 billion of bonds this quarter and is unlikely to return to the market in the second half of 2010, according to Dmitry Dudkin, head of fixed-income research at UralSib Financial Corp. in Moscow.

Yields on Russia’s 7.5 percent dollar bonds due 2030 dropped to a low of 4.869 percent yesterday from above 12 percent in October 2008 as oil prices rising above $80 a barrel spurred the economy’s recovery from its worst slump since the collapse of the Soviet Union in 1991, according to JPMorgan Chase & Co.

Investor demand may allow Russia to get a lower yield on its Eurobonds than on existing debt, Moscow-based Renaissance Capital said in a report yesterday. That would put the yield on 10-year dollar bonds at a possible range of 4.375 percent to 4.625 percent, according to Renaissance, compared with 4.92 percent on Russia’s 2030 bonds yesterday.

“People are probably getting prepared for more Russia exposure,” said Regis Chatellier, a London-based emerging- market strategist at Morgan Stanley. He said funds own near the same amount of Russian debt that’s represented in benchmark indexes and holdings may have fallen in part because investors shifted to lower-rated credits that outperformed during the rally in emerging-market debt.

Wasteful Spending

Russia’s bond sale may damage the economy because it threatens to spur wasteful government spending and slow reforms, Troika Dialog’s Moscow-based economist Evgeny Gavrilenkov wrote in an April 1 report. Gavrilenkov said the government doesn’t need to borrow abroad with oil prices at current levels.

Russian foreign-currency debt has returned 25 percent during the past year, beating the 23 percent gain for global emerging-market debt, according to JPMorgan’s EMBI+ Indexes. The rally helped increase assets under management in developing- nation debt mutual funds to a record $74.7 billion last month, according to research firm EPFR.

Russia is considering registering its new bonds with the U.S. Securities and Exchange Commission to appeal to a wider group of international investors, Deputy Finance Minister Dmitry Pankin said in February. The debt may become eligible for inclusion in a bigger range of global debt indexes than Russia’s current bonds, attracting demand from investors outside the emerging-market funds, said Standish Mellon’s Kozhemiakin.

‘Wider Array’

“You’re going to see this issue introducing Russia to a wider array of investors,” he said. “Depending on pricing, we’ll be looking for opportunities to participate in the Russian deal.”

Russia hired Barclays Capital, Citigroup Inc., Credit Suisse Group AG and VTB Capital to arrange the sale on Feb. 5. The government’s debt is rated BBB by Standard & Poor’s, two levels above non-investment grade, and one step higher at Baa1 at Moody’s Investors Service.

--Editors: Gavin Serkin, Lester Pimentel

To contact the reporter on this story: Michael Patterson in London at [e-mail]; Denis Maternovsky in Moscow at [e-mail]

To contact the editor responsible for this story: Gavin Serkin at [e-mail].

Bloomberg: Russia Vulnerable to Budget Crisis, Renaissance Says (Update1)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avsMliKtm0Dw

By Paul Abelsky

April 13 (Bloomberg) -- Russia’s current fiscal policy leaves it vulnerable to an “inevitable” new global downturn and may lead to a budget crisis if demand for oil sours, Renaissance Capital said.

“We note that at this point Russia, in financial terms, isn’t ready for a new global crisis, which is inevitable, unfortunately,” Renaissance economists led by Alexei Moisseev said in a report today. “To change the situation, it needs to liberalize its currency policy, look at ways of cutting the budget deficit and avoid accumulating external debt.”

The government raised expenditure four-fold over the past decade, Finance Minister Alexei Kudrin said last week. Russia, which last year posted a fiscal gap of 5.9 percent of economic output, the country’s first in a decade, may run a deficit this year of between 6 percent and 6.8 percent, Kudrin said on April 1. The three-month shortfall widened to 3.2 percent, the Finance Ministry said last week.

State stimulus spending may become a more important driver of Russia’s economic recovery as “new sustainable growth sources have yet to be found,” according to RenCap, the brokerage half-owned by billionaire Mikhail Prokhorov.

‘No Longer Possible’

An “analysis of the federal budget indicates that any build up in spending is no longer possible,” the economists wrote. “Moreover, if the current budget policy remains intact, we believe Russia could face a budget crisis depending on the market situation for major export goods.”

The “risk factors” linked with Russia include any material fall in oil prices, external economic shocks and the ruble’s depreciation, according to a copy of Russia’s preliminary Eurobonds prospectus, obtained by Bloomberg News.

Government officials plan to meet investors for a series of bond meetings starting today in Germany and running until April 21 in Europe, Asia and the United States as they prepare to market the country’s first foreign-currency bonds since 1998.

Russia plans to borrow as much as $17.8 billion abroad this year in its first sale of international bonds since it defaulted on $40 billion of domestic debt and devalued the ruble in 1998.

The government should abandon the planned debt sale to foreign investors and “more actively” tap the domestic bond market, Renaissance economists said in the report.

‘High’ Flexibility

“In an environment of a persistent budget deficit and high dependence on commodity prices, it is important to ensure the highest degree of flexibility in terms of managing state finances,” the report said. “This is achievable only in the absence of external debt.”

The government needs the price of oil to average more than $100 a barrel to balance its budget, the investment bank said. Budget revenue may drop by about 100 billion rubles ($3.4 billion) this year as slower inflation erodes government income, according to Renaissance.

Urals crude, Russia’s chief export blend, plunged 77 percent between July 2008 and December 2008, reaching a low of $32.34 on Dec. 24, 2008. It has since gained almost 154 percent and was trading at $82.06 today.

Consumer-price growth will probably reach between 6 percent and 7 percent in 2010 compared with the rate of 10 percent on which this year’s federal budget is based, the bank said.

To contact the reporter on this story: Paul Abelsky in Moscow at [e-mail].

Last Updated: April 13, 2010 08:17 EDT