Russia Debt Risk Drops Most in Four Months on Growth
July 30, 2010, 5:44 AM EDTBy Jack Jordan
(Adds updated market prices from second paragraph.)
July 30 (Bloomberg) -- The cost of protecting investors from a default on Russian government bonds fell the most in four months in July, helped by rising oil prices, accelerating economic growth and a declining budget deficit.
Russia’s five-year credit-default swaps dropped 32 basis points, or 0.32 percentage point, the biggest monthly decline since March, to 164 as of yesterday. The move was more than the 21 basis-point retreat for Brazil contracts, 18 for Mexico and 14 for China, according to data compiled by Bloomberg.
Investors are gaining confidence in Russia’s ability to service its debt as the 15 percent rally in oil from this year’s May 20 low boosts the recovery for the world’s biggest energy exporter. The economy grew an annual 5.4 percent in the second quarter, the government said this week, up from 2.9 percent in the first three months of 2010. While default protection on Russia remains 47 basis points more expensive than for Brazil, whose debt is ranked lower by credit rating companies, the gap narrowed from 58 at the end of last month.
“Russia is seen as being at the riskier end of emerging- market assets, but you could argue that isn’t justified,” said Neil Shearing, senior emerging-market economist at London-based research consultancy Capital Economics Ltd. “So long as the global environment remains supportive, I’d expect CDS to keep falling in Russia.”
GDP Grows
Russia may lift this year’s growth forecast after increased domestic spending boosted gross domestic product in the second quarter, Deputy Economy Minister Andrei Klepach told reporters on July 27. The government currently forecasts a 4 percent expansion for 2010.
Prime Minister Vladimir Putin said this week the budget deficit should shrink to 3.6 percent of GDP next year, Interfax reported. The gap was 5.9 percent in 2009 as the economy shrank 7.9 percent, the most since the Soviet Union collapsed in 1991.
Russia’s foreign-currency bonds returned 3.6 percent so far this month, compared with a 2 percent advance for similarly rated Mexico and 3.4 percent for Brazil, JPMorgan Chase & Co. indexes show. The extra yield investors demand to hold Russian sovereign debt rather than U.S. Treasuries dropped 52 basis points, the biggest monthly decline since December, to 231 yesterday, compared with 277 for emerging markets as a whole, according to JPMorgan.
Eurobonds
Russia’s foreign-currency debt is rated BBB by Standard & Poor’s, the same as Mexico’s and one level above Brazil’s.
Yields on the first Eurobonds issued by Russia since 1998 are at their lowest since the notes were sold in April. The 2020 dollar bonds rose 0.1 percent today to 100.8 cents on the dollar, according to prices on Bloomberg.
The ruble weakened 0.3 percent against the dollar to 30.2551 after reaching the highest level since May 13 yesterday, paring its advance in July to 3.3 percent. Non-deliverable forwards, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble at 30.4663 per dollar in three months.
The Micex Index of Russia’s largest stocks rose 8.3 percent and shares in gas monopoly OAO Gazprom surged 15.1 percent this month.
Emerging Debt
Russia is benefiting as investors turn to higher-yielding assets on optimism the global economic recovery is gathering momentum. Emerging-market bonds are headed for their best monthly returns since September, gaining 4.3 percent, according to JPMorgan indexes. Russia credit-default swaps may drop to 150 basis points, said Nigel Rendell, senior emerging-market strategist at RBC Capital in London.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The Reuters/Jeffries CRB Index of 19 raw materials rose about 5 percent in July. Crude for September delivery gained $1.39, or 1.8 percent, to $78.38 a barrel on the New York Mercantile Exchange yesterday. Prices have risen 24 percent in the past year and are up 3.9 percent this month.
“The trend we’ve seen over the past few weeks has come from the international background,” Rendell said. “There’s an appetite for risk out there.”
--Editors: Stephen Kirkland, Gavin Serkin
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To contact the reporter on this story: Jack Jordan in London at jjordan22@bloomberg.net.
To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net
