Russia returns, investors should rejoice
Fear of US sanctions kept Russian borrowers out of the market for much of 2018. Now they’re coming back, and investors would be well advised to get involved.
Russia has long been a mainstay of emerging markets portfolios but, with US sanctions of Oleg Deripaska’s EN+ and Rusal, its role for most investors has waned.
Primary bond supply from Russian borrowers slipped from second place in CEEMEA in 2017, with $26.9bn to fourth in 2018 with $12.7bn.
Part of this decline was only natural. Years of heavy borrowing should naturally be followed by a period of scarcity for the simple reason that borrowers will have smaller needs.
But it is undeniable that the sanctions on Russian oligarchs and their companies imposed in April 2018 caused chaos in Russian equity and debt markets.
The sanctions arrived unannounced, blindsiding Russian businesses and investors around the world with a vicious salvo of trading restrictions — punishment for Russia’s meddling with US elections.
Investors dumped their securities and, with the threat of further sanctions — perhaps affecting the sovereign — still looming, kept their hands in their pockets and reallocated their Russian money elsewhere.
But, throughout 2018, the picture slowly began to clear. The Russian central bank — a reliably technocratic institution much loved by EM investors — raised rates in September, combating the depreciation of the rouble, and it began to seem as though the US's sanctions office, OFAC, had done its worst.
Then in January, the sanctions on EN+ and Rusal were lifted, boosting sentiment still further.
Not everyone agrees that Russian debt is safe from future sanctions, but many investors are starting to warm up to the idea of getting back into Russia.
This week brought a new round of sanctions — the US, Canada and the EU’s joint response to the seizing of Ukrainian ships in the Sea of Azov in November — but they scarcely register on investors’ radars.
In fact, the limp effort has actually emboldened some investors, who think that these new sanctions have set the tone for the future of economic diplomacy between Russia and the West.
They may be right. The savagery of OFAC’s April 2018 round of sanctions drew plenty of American blood and have earned the US Treasury a lawsuit from Oleg Deripaska.
Of course, in these unpredictable times, some new event could easily cause relations to break down once more, but right now there's an excellent window for borrowers from the country. Russian companies are coming back to the market — witness Credit Bank of Moscow, Norilsk Nickel, Evraz — and investors are warming up.
Yields on Russian assets have yet to catch up with the improvement in the diplomatic outlook — so there’s excellent value for those who move quickly.