Fixed Income - Navigating the Volatility in Russia's Bond Space

In this Q&A format report, we put the current volatility into a historical perspective and share our thoughts on potential scenarios for the Russian bond universe. In a nutshell, we think a cautious stance is still warranted in the short term, but we expect the backdrop to improve at some point later this year. > Sovereign geopolitical premium. In long OFZs, we estimate it at 110 bps. Back in 1H14, the premium at times reached as high as 200 bps. In dollar sovereign Eurobonds, it stands at 65 bps in longer issues and 160 bps in the belly of the curve. On our estimates, the largest yield premium was around 300 bps in early 2015.> Our baseline scenario. We believe the rollercoaster price action could continue for some time and that downside risks are still substantial. However, we expect to see relief by the end of the year. If market conditions improve, we would pick up 5-10y fixed-coupon OFZs and the Russia 26 and 27 Eurobonds. > Potential support from CBR/Finance Ministry. There are plenty of tools available that could be deployed in a risk scenario, ranging from regulatory forbearance measures to cuts to the borrowing program.> Risk premium in corporate bonds. We currently estimate it at 80-100 bps in the 7-10y segment for Gazprom dollar bonds. In a scenario of a gradual recovery from here we would prefer O&G and select banking hard-currency bonds.> Risks related to challenging primary market for corporates. The debt repayment schedule looks manageable under any scenario. Russian corporates have generally retained a high degree of financial flexibility with healthy cash flows and supportive FX liquidity in the local market. Still, the market may reprice the probability of call options being executed this year on some subordinated banking bonds.