Sovereign Update / Russia
Ahead of the presidential election scheduled for 18 March, the government has announced that it is planning both a Eurobond swap and new Eurobond issuance this month. The recent upgrade of Russia’s sovereign external debt rating by one notch to BBB- by S&P creates a favourable backdrop for these plans. Still, we are not convinced that the tightness of Eurobond spreads is going to persist in the coming months.
The recovering economy and relatively stable oil prices provide a positive environment for the election. While the outcome of the election is a foregone conclusion, it remains to be seen whether the lopsided election campaign secures a decent turnout. President Putin has already unveiled outlines of the economic programme of the next term envisaging a tilt from defence spending towards investment into infrastructure and demographics. What Putin did not mention was how this extra spending was going to be financed.
The rise in core yields creates headwind for all EM issuers, irrespective of their ratings and fundamentals. In the last few days, this was compounded by a negative sentiment caused by President Trump’s threat to impose tariffs on all steel and aluminium imports to the US. While Russia does not count the US among its main trade partners, its steel and aluminium producers could still suffer indirectly if the EU retaliates with its own protectionist measures.
In a short term, extra demand generated by the inclusion of Russian sovereign debt into bond indices on the back of the recent upgrade may support Eurobond prices and make Russian Eurobonds relatively immune to swings in global sentiment towards EM credit. However, we remain worried about the unrealised threat of further sanctions. We think that new measures that could further complicate doing business with Russian companies, and in particular with Russian banks, would have negative repercussions for future investment and growth. In addition, we continue to believe that the oil market remains too complacent in the face of galloping rises in supply from non-conventional sources, in particular, the US shale oil, and overestimates stability of the current arrangement between OPEC and non-OPEC oil producers.
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MEET THE FOUNDER. Tatiana Orlova holds a MSc in Economics from the LSE and has worked as an Emerging Market economist and strategist since graduation in 2001. She has been employed in EM research teams in four investment banks covering a diverse range of CEEMEA economies, with a particular specialism in the post-Soviet economies.
Tatiana is a widely known expert on the post-Soviet economies who has given multiple interviews to major world financial media (such as FT, Bloomberg, Reuters, CNBC etc) and spoken at conferences attended by hundreds of clients. Tatiana’s unique background and experience, as well as her deep knowledge of the region’s economics, history and geopolitical realities, allows her to make accurate forecasts and predictions across the range of Fixed Income instruments. She has covered the region’s hydrocarbon producers during the oil crises of 2008-2009 and 2014-2016, and issued a range of successful calls. Most notably, in September 2014 she predicted that Russia was about to lose its investment grade sovereign rating, which was a highly non-consensus view. Similarly, she correctly called imminent downgrades of sovereign ratings of Azerbaijan and Kazakhstan during the following winter. She also has a track record of successful FX and interest rate recommendations.
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