A Month After Tighter Sanctions, Russia Risk Drops to a Four-Year Low

(Bloomberg – bloomberg.com – Natasha Doff, Ksenia Galouchko – August 24, 2017)

[Text with charts: bloomberg.com/news/articles/2017-08-24/month-after-sanctions-storm-russia-risk-drops-to-four-year-low]

Less than a month after the U.S. toughened its main sanctions against Russia, a measure of the country’s political risk is back to its lowest level in four years.

The cost of insuring Russian debt against default for five years using credit-default swaps dropped to 146.5 basis points on Thursday, a level not seen since well before the nation’s annexation of Crimea in 2014. That’s cheaper than most periphery countries in the euro area, including Italy and Portugal.

Investor confidence is returning as attention in Washington shifts away from Russia’s alleged meddling in the 2016 U.S. presidential election, which dominated headlines in June and July. Since then the focus has moved to nuclear threats from North Korea, racial violence in the American south and and growing signs of policy gridlock in the U.S.

“The country has benefited from the fact that Russian issues have been put on the back burner in Washington,” said Jim Barrineau, the co-head of emerging-market debt at Schroders Plc in New York. “We added some local Russian bonds about a month ago, believing that a rebound was overdue.”

The drop in CDS pricing suggests that investors are not too bothered by local events. A court ruling ordering one of Russia’s largest private holding companies to pay state-owned oil giant Rosneft PJSC damages of 136 billion rubles ($2.3 billion) barely registered, even though the case is seen as a setback for investor rights in Russia.

The ruble has strengthened 2.4 percent since the sanctions law was signed on Aug. 2, paring some of the losses it incurred when the uproar over election hacking was in full swing. The currency’s one-month volatility this week dropped to a three-year low and Russia’s benchmark Micex stock index has rebounded 8.3 percent since entering a bear market in mid-June.

Now that the noise around sanctions has died down, Russia’s high bond yields and rate-cutting cycle is again making it a favorite play in this year’s emerging-market rally, according to John Roe, the London-based head of multi-asset funds at Legal & General Investment Management. The country’s 10-year bonds yield about 7.8 percent, with only Turkey and South Africa offering higher returns among major emerging-market nations.

“A lot of these geopolitical risk stories are buying opportunities and then things just stabilize back to where they were,” he said. “Everyone loves Russia.”

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