Bloomberg News

Goldman Says Russia Must Revamp Market in Investment Jostle

April 27, 2012

Russia must push ahead with plans to overhaul its financial markets and focus on taming inflation as it jostles with emerging nations such as Brazil for global investor cash, according to Goldman Sachs Group Inc. (GS:US)

The world’s biggest energy exporter may attract more investment by meeting a July target to allow foreign funds access to its local debt market, said Francesco Garzarelli, Goldman Sachs’s co-head of macro and markets research. The step is part of a plan to turn Moscow into a global financial hub.

“There’s a lot of money flowing around and it’s yielding close to nothing,” Garzarelli said April 25 in an interview in Moscow. “If someone’s there to sell a credible structural story, it’s easy to come up on the map. But it has to be followed through.”

Russia, which has endured $340 billion in net private capital outflows since 2007, has merged its two biggest stock exchanges and is creating a central depositary to help lure investment. A plan to allow foreign investors to settle ruble bond trades through Euroclear Bank SA, the world’s biggest bond- settlement system, from July is in doubt after the Interfax news service reported a presidential working group voted against the idea on April 20.

Garzarelli highlighted Brazil’s success in nurturing a domestic institutional investor base and improving financial infrastructure.

Off The Map

“Russia’s not entirely on the map here,” he said. “There’s foreign funding, they’re trying to develop some of the domestic markets, but it doesn’t seem like a story that captures the non-specialists.”

Mexican five-year domestic bonds with the same credit rating as ruble debt and available on Euroclear yield 233 basis points less than similar-dated Russian OFZs. The spread was as low as 111 basis points in July.

Russian local-currency debt has returned 6.7 percent in the last year, compared with a 20 percent advance for real- denominated Brazilian bonds, according to JPMorgan EMBIG indexes. The ruble-based Micex (INDEXCF) index is up 4.1 percent in 2012 compared with an 9.6 percent advance for Brazil’s Bovespa. (IBOV)

Brazil’s central bank has been a “key element” in the South American nation’s development as policy makers gained credibility by controlling price growth, according to Garzarelli. Annual inflation as measured by the IPCA-15 index slowed to 5.25 percent in mid-April, the lowest rate since October 2010. Prices rose 6.5 percent last year.

Inflation Struggle

After bringing the annual rate of price growth to a post- Soviet low of 3.7 percent in February and March, Russia’s central bank may struggle to meet its 2012 inflation target of 5 percent to 6 percent, Chairman Sergey Ignatiev said April 5.

The regulator says it plans to hold the rate at 4 percent to 5 percent in 2014, when it will complete a transition to inflation targeting instead of focusing on the exchange rate.

Slower inflation has helped Russian debt offer positive real interest rates. Still, that alone may not be enough to tempt investors away from other nations, Garzarelli said.

“You probably need to see market infrastructure develop in addition to the enticement of the yield,” he said. “You’re basically asking people to redefine their emerging-market allocation.”

To contact the reporter on this story: Scott Rose in Moscow at

To contact the editor responsible for this story: Balazs Penz at

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