Page 92 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
In general, Troika observes that bond funds prefer countries with higher spreads; however, Russia is the exception and funds were overweight in Russian bonds, when compared to its weighting in the emerging market indices, attracted by its solid fundamentals.
Figure 4.13: Russia’s beta, 1Q2004–3Q2006 (bp)
1.2 1.0 0.8 0.6 0.4 0.2 0.0
Source: Bloomberg, Troika Dialog
Six-month rolling beta
of weekly changes in
EMBI+ Russia spread on changes in EMBI+ spread, bps
1Q04 3Q04 1Q05 3Q05 1Q06 3Q06
Domestic sovereign bonds
After the 1998 financial crisis the domestic sovereign bond market became something of a backwater. The state's policy of paying down debt early and the budget surpluses enjoyed by the Ministry of Finance mean the state has issued only enough bonds to keep the market alive, rather than tapping domestic investors as a source of capital.
And the Ministry of Finance has all but ceased issuing short-term bonds, which were the staple diet of the market in the 1990s: none were issued in 2006 and the Ministry says it has no plans to issue any in 2007 either.
The lack of bond issues is reflected in the secondary market, where liquidity is thin and the turnover in bonds is limited, largely because the biggest buyer on the market is the state pension fund, which tends to hang on to its bonds.
Government debt strategy
However, 2005 marked a change of phase, as the Ministry of Finance began to increase the amount of bond issues, not so much as to raise capital, but to develop the bond market as part of its strategy to develop interest rates to the point where the CBR could use the overnight rates as a method of monetary control.
The state borrowing in the form of bonds was up by a fifth in 2006 to just over RUB1trn of federal loan bonds issued by the Finance Ministry, the so-called OFZ.
These come in a variety of flavours: the OFZ-AD has a sinking fund provision and accounted for 65% of the government's borrowing in 2006; the OFZ-PD has a fixed yield and accounted for 20%; and the OFZ-FK has a fixed coupon rate and made up 9.2%.
In addition, the government issued RUB52bn worth of GSO-FPS bonds, a savings bond that made up just over 5% of the total.
Over 2006, the government's debt policy aimed at substituting external borrowings with local debt and the development of the local federal bond market. The government ran a budget surplus of over 7% of GDP in 2006 and expects to have a surplus of more than 4% in 2007, so it barely needs to borrow.
The government has scheduled the placement of three new bond issues in 2007, maturing in three (OFZ 25061), five (OFZ 26199) and 11 years (OFZ 46021). On the whole, these are expected to further improve the liquidity of OFZ bonds and strengthen their position as a benchmark for ruble bonds.
In 2006 the government introduced new securities – GSB (government saving bonds) – in order to provide pension funds with securities to invest in, and thus improve liquidity in, traded sovereign bonds – OFZs.
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