Page 82 - RusRPTFeb22

Standard & Poor’s (S&P) rates both Russia’s foreign debt at BBB- with stable outlook and the local debt at BBB.
S&P has also been fairly consistent on Russia’s rating. Its lowest grade was BB+ (negative) awarded in January 2015. The highest was BBB awarded in December 2008.
8.5 Fixed income
Geopolitical tensions and concerns are distorting current market prices for Russian bonds which have become unappealing. However, our revision of the medium-term forecast is not just a mark-to-market of our forecasts: we now assume that the change in the foreign appetite for OFZs is a structural factor, which influences the shape of the term premiums in the curve. Non-residents have been reducing their OFZ holdings for many months, bringing foreign ownership down to 19.0%, from 20.5% in mid-November. We think that outflows will be less severe in the next few weeks, but that the foreign bid will not return in the size needed to boost their share back to previous levels. We anticipate that foreign ownership in OFZs will fall to 15-16% by YE22F (Figure 5).
The foreign share in OFZs has historically been driven by real yields (Figure 3). Real rates in Russia are now low by historical standards, and with inflation set to remain high until 2022F, we do not expect the situation to improve any time soon. Compared with other local EM markets, the level of long real rates in OFZs does not look particularly attractive either. Meanwhile, January’s uptick in volatility, in our view, might push investors to demand a higher return in future. While solid fundamental factors provide a strong anchor for investors in Russia, one way or another geopolitics have regularly distorted the price action in recent years, becoming less of a one-off factor.
There is a clear link between volatility and total returns in EM local bond markets (Figure 4). In Russia, the volatility of the 10-year benchmark’s annualised daily returns was around 0.6%, which is consistent with a 9% annualised return. Excluding the most volatile historical periods, volatility inches down 0.1pp to 0.5%, which corresponds to roughly a 7% return. Currently, we observe a volatility spike of about 0.2pp in OFZs, which is going to take a considerable time to dissipate. We also conclude that the increase in the foreign share in OFZs in 2015-20 went against the common trend in EM (Figure 2). From this viewpoint, the behaviour of international investors in OFZs is catching up with the global medium-term trends.
82 RUSSIA Country Report February 2022 www.intellinews.com