Don’t expect the bear to bounce yet
The Russia-Ukraine crisis has risen from its slumber in a roaring angry temper. Russia’s next recovery in the capital markets may not be as quick or as painless.
The bond market bounced back quickly in the months after February's events, but investors should not expect the same in this iteration of the crisis.
After a mere two months of hand-wringing over possible sanctions following Russia’s annexation of Crimea, ABH Financial was back in the market with a €350m bond, and Sberbank, Gazprombank and even Promsvyazbank — with a dollar tier two — followed shortly afterwards. It was an extraordinary rebound from a market shutdown that many had predicted could extend into 2015.
The backlash from the West is stronger this time. The US and EU sanctions are now hitting state-owned companies reliant on the debt capital markets. The assumption that sanctions would remain weak and a compromise reached has been annihilated. There is talk of a new cold war.
The papers are also worked up. This time, there are international casualties, which will keep the international media focused on reporting the situation. Even Fifa is being dragged into the debate, courtesy of Nick Clegg. We all know how the public loves a football story.
In the markets, some analysts say that investor reporting lines are the key to predicting the path of any Russian recovery.
Over the last few months, once it became clear there would be no harsh sanctions, end investors may have forgiven their funds for taking a punt on a Russian rebound — no one wants to miss the rally after all. But at this point, if you keep adding Russian risk and are wrong, how do you explain to your superiors and your investors why you chose to do so? After the latest round of US sanctions, some feel that to risk being caught with your pants down betting against harsher sanctions from the EU is worse than being caught missing out on a recovery — at least there is the fig leaf of sell-off in the last couple of weeks to hide behind.
The revived bond market fears have served to remind investors of the perils of investing in a country where there is a known outstanding situation that has not been resolved. The markets have become so used to sell-offs and rebounds that the rebound happened sooner than the situation on the ground in Ukraine merited. In EM more than other markets, chasing the market up and down is sometimes not the wisest move.
For now, appetite for Russian bonds has disappeared. It is hard to see when the risks will next match the rewards.