Page 13 - RusRPTApr19
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cancel several auctions for the first time in years. During this time yields rose from circa 7% to touch on 9% last autumn. Even though yields have fallen back somewhat since then the OFZ still pay over 8% -- the same return investors expect from long-term equity investments.
But the selling has stopped. In the second week of March the Ministry of Finance managed to place its biggest tranche of OFZ ever as investors are “risk on” and yield hungry again, now it is clear the US Fed has stopped its monetary policy tightening and may even lower interest rates this year.
Changing the game
Since March 2018 the percentage of OFZ’s owned by foreigners has dropped precipitously and consistently. At its peak one year ago, the non-resident share of Russian local debt was RUB2.35 trillion ($36bn), whereas the most recent data has it at RUB1.70 trillion (~$26mn) as of February 2019
The sell-off by large institutional investors, such as Eaton Vance, Ashmore Capital, and Morgan Stanley, has contributed to the sizable drop in foreign ownership.
Many have pointed to the increasing possibility of US sanctions targeting Russian government bonds as one of the reasons behind the foreign bearish sentiment, but just as important, if not more, is the new dovish stance by the Fed that always fuels investment into emerging markets and Russia in particular.
According to Bloomberg Barclays indices, Russian ruble-denominated sovereign bonds are up 7.5% YTD while the ruble has returned 5.6% YTD. In fact, OFZ auctions on March 13 sold RUB91.44B of the sovereign bonds, the largest amount issued in recent years, with a three-year coupon of 8.02% and 10 year coupon of 8.47%. The auction was a triumph for the Ministry of Finance, but nonetheless, foreign investment still depressed compared to recent years.
Taking stock of equities
Despite the recent sell off in equity markets, the Russian focused funds are still ahead of the game.
The VanEck Vectors Russia ETF (RSX) is up 9.58% YTD, beating the iShares MSCI EM (EEM) benchmark, which has returned 8.91%. Strong yearly gains are in part a recovery from an abysmal fourth quarter of 2018 for emerging markets in general, but it seems as if the strong performance in Russia is not merely a relief rally. High demand for Russian securities has been supported by an increasingly insulated domestic economy and a famously conservative fiscal structure. Inbound investment has also been driven by the strong performance of crude, which is up 26% YTD, as well as a recently implemented hike to pension retirement ages that went into affect last summer.
Economic growth is still weak: GDP rose 1.8% in 2018, and will likely decelerate to 1.5% in 2019 in the face of higher domestic interest rates and VAT hikes. However, Russia is not at the end of the business cycle; interest rates were unexpectedly hiked in late 2018 for the first time since 2014 in a response to rising inflation. The CBR expects inflation to peak at 5.5% in 2019, before returning to 4% in 2020. Interest rates will likely be eased in late 2019, after inflation peaks and thevocally dovish central bank will likely drive demand for OFZ’s in the short to medium-term.
Sword of sanctions
The main concern of foreign OFZ holders is that the next round of US sanctions – Defending American Security Against Kremlin Aggression Act (DASKAA) due to go before Congress in April – will either limit secondary
13 RUSSIA Country Report April 2019 www.intellinews.com


































































































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