Russia reforms due in Nov seen sparking ruble bond rally

By bne IntelliNews September 12, 2012

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In November, Russia's capital market is due to join the international settlement system Euroclear, which for the first time will give foreign investors unfettered access to Russia's sovereign and corporate ruble bond market. Analysts expect demand to increase dramatically, sparking a rally in Russian bonds.

"This autumn's capital market reforms could spark a rally, the first signs of which are already apparent. Moscow's major exchanges were merged last year and a Central Securities Depository (CSD) has been created. Next up, Russian local bonds will become accepted for settlement through the Euroclear and Clearstream international settlement systems - probably in November - opening the market to entirely new pools of capital," says Elena Kolchina, a fund manager at Renaissance Asset Managers.

Currently, the ruble bond market is dominated by Russian banks, which hold a combined portfolio of about $150bn, or about 60% of domestic corporate bonds and state OFZs. Domestic institutions account for another 20% of investments in the local corporate market. And demand is increasing, as the assets of the Russian banking sector are growing by 20% a year on average.

"Despite Russia's robust fundamentals, foreign investors are still ignoring the ruble bond market and account for only 5-8% of [state bonds] OFZs, against the average amongst Russia's emerging market peer group of 20%," says Kolchina. "That will change this autumn when Russia should emerge as one of the hot spots in the world and the Russia's ruble bond market comes of age."

The capital market reforms have been implemented steadily over the last few years. Before the introduction of recent liberalisation measures, non-resident investors could buy and sell OFZs on Russia's local exchange, but were forced to opening accounts in Russia, which created obstacles for investors and, depending on the arrangement, presenting legal risks that were often prohibitive. Some big investors - like US pension funds - were precluded entirely due to stringent regulations.

In January, over-the-counter trading for OFZ was introduced that allowed better and direct access to the market for some non-residents using local depositories and the international Clearstream settlement system. The first OFZ offered under the new rules in February saw demand spike and the state doubled the size of the offering. However, lingering bureaucratic problems have muted demand.

The next change due in November is the big one, when the Russian capital markets will be hooked up to the Euroclear system, which in effect offers full access to the whole of Russia's ruble bond market - both sovereign and corporate.

In addition to the creation of the CSD, international depository companies will also be allowed to open offices that will offer a seamless integration of trading flows to international investors who already have accounts with these depositories in other countries.

The changes will also nix some of the regulatory restrictions on big institutional investors and so open up huge new pools of capital to investing in Russia. Given the country's rock solid fundamentals, the low yields in developed markets, and almost impeccable payment record, allocations to Russia's bond market are expected to increase significantly.

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