Russia's risk premium over other Bric nations narrows

By bne IntelliNews October 21, 2010

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Russia's economic rebound is sending the cost of protecting against a bond default to the cheapest level relative to Brazil in five months, Bloomberg reported data as showing.

Russia's bond market is booming, with Russian banks and now the country's companies raising record volumes of cash at record low yields, and analysts say that yields have further to fall as the gap between Russia and the other Bric countries of Brazil, India and China narrows. Meanwhile, five-year credit-default swaps (CDS) - the price of insuring bonds against the risk of default - on Russian debt dropped 25 basis points (bps) in October to 134.5, narrowing the gap over Brazil to 36 bps, the tightest level since May, according to CMA, a data provider. Russia's record-low 3% yields on dollar bonds due in 2015 are now just 80 bps above the same-maturity notes from Brazil.

While Russia's economic recovery is the slowest among the other Bric countries, oil above $80 a barrel and a jump in foreign currency reserves to more than $500bn for the first time since October 2008 are spurring investor confidence. As Brazil raised foreign investment taxes for a second time in October to stem gains in its currency, Finance Minister Alexei Kudrin said in Moscow that Russia is moving in the "opposite" direction and reducing exchange-rate intervention.

"This is a market opportunity," says Jeremy Brewin, who helps manage $2bn of emerging-market debt at London-based Aviva Investors, the fund management arm of the UK's second-biggest insurer. "Investors over time are going to concentrate more on Russia."

Russia's 'Baa1' rating from Moody's Investors Service is two levels higher than Brazil at 'Baa3', five steps above the Philippines at 'Ba3' and four more than Turkey at 'Ba2'. But even after a five-week rally that cut the yield on Russia's 2015 bonds by 66 bps, the 3% rate is still above Brazil, the Philippines and Turkey. "The hunt for yields makes Russia a very exciting place to be," says Sergey Dergachev, who helps manage $6bn of emerging-market debt at Union Investments in Frankfurt. "Nowhere in the emerging-market world can you buy strong quasi-sovereign or blue-chip, high-grade debt with such juicy yields. I do see further room for yield compression."

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