WHY RUSSIA

Current valuation levels of Russian debt and equity do not yet reflect the economic turnaround of Russia

PROS

HIGH Dividend yields:

  • 5%+, meaningful compared to EM peers and the world

LOW Valuation:

  • 7.2 P/E for RTS index - still among the cheapest in the EM equity space;

HIGH Commodity exposure:

  • world’s 2nd largest producer of crude oil and natural gas and 1st exporter of gas accounting for 19% of world’s total gas trade

GOOD Diversified economic growth:

  • Agriculture, Consumer, and IT Sectors offer attractive growth potential

LOW Debt exposure:

  • 10Y USD sovereign bonds yield 4.028%, 168 bps above G-Spread Government-debt represents only 17% of GDP, least indebted country in Europe on sovereign and corporate level
PRESS RELEASES
SELECTED THIRD PARTY NEWS

24 May 2018 – Russia Economic Forecasts in May 2018 – Bloomberg Survey report

The Russian economy will expand 1.9% in 2018, 1.7% in 2019 and 1.6% in 2020, according to a survey conducted by Bloomberg News.

  • Survey of 33 economists conducted from May 18 to May 23
  • Chance of a recession happening over the next 12 months is 15 percent, according to 7 respondents
  • 2018 CPI forecast at +2.9% y/y versus prior survey +3%
  • 2019 CPI forecast unchanged at +4% y/y versus prior survey
  • Russia key rate seen at 7.25% by end-2Q18, current rate is 7.25%

23 May 2018 – Time to Buy Emerging Debt, From Argentina to Russia, UBS Says – Bloomberg

Is it time to jump back into emerging-markets bonds? UBS Group AG thinks so.
Strategists at the Swiss bank said they would use the recent sell-off to buysovereign debt from Indonesia, Argentina, Russia and Nigeria, in a note Tuesday. They also prefer emerging-market corporate bonds relative to their developed-market equivalents, despite the pair’s growth cycles moving in different directions, according to the report.
“EM’s growth may be coming under question, but its stock variables, such as short term debt owed to foreigners, are in reasonable shape,” the strategists including Bhanu Baweja wrote.

22 May 2018 – Russia Activity Data (Apr.) – Capital Economics

Recovery continues at the start of Q2.
The latest Russian activity figures suggest that GDP growth picked up to about 1.5% y/y at the start of Q2. These data also provide early evidence that the tightening of US sanctions and the fall in the ruble in early April have had little impact on the real economy so far.
The relatively soft start to the year means the risks to our above-consensus growth forecast of 2.5% for 2018 lie to the downside, but we still think the recovery will gather pace over the coming quarters. The pick-up in real disposable income growth, to 5.7% y/y last month, from 4.5% y/y in April, points to stronger consumer spending ahead. And the central bank is likely to resume its easing cycle.

16 May 2018 – Russia GDP (Q1 2018) – Capital Economics

Russian GDP expanded by a weaker-than-expected 1.3% y/y in Q1, but the data do at least confirm that
the economy is recovering from its slowdown in late 2017. And we think growth will strengthen by more
than most expect over the rest of this year

  • Today’s data were below both the Bloomberg consensus forecast (1.5%) and our own higher forecast (1.8%). Rosstat hasn’t published a breakdown of the national accounts figures yet, but the monthly activity figures suggest that weakness in the construction and retail sectors more than offset a pick-up in agriculture and a rebound in the industrial sector.
  • The softer-than-expected outturn means the risks to our above-consensus GDP growth forecast of 2.5% this year now lie to the downside. But we’re not going to throw in the towel.
  • More fundamentally, we think the conditions are still in place for the recovery to gather a bit of pace. The latest survey figures suggest that conditions in the manufacturing and services sectors improved last month.
  • In addition, lower inflation and labour market improvements should boost consumer spending. The central bank is likely to resume its easing cycle and the recent rise in oil prices may give the government scope to provide fiscal support. So for now we are sticking to our forecast for GDP growth of 2.5% this year; the consensus forecast of 1.8% looks too downbeat.

11 May 2018 – Emerging Europe: what to expect from the Q1 GDP figures – Capital Economics

Regional growth strengthened a touch in Q1, driven by an improvement in Russia

  • The pick-up in aggregate regional growth masks divergences at a country level. It appears that Russia was the only economy to experience a meaningful acceleration in growth, driven by a substantial improvement in industrial production. After contracting by 1.7% y/y in Q4, industrial output rose by 1.8% y/y in Q1. All told, our GDP Tracker suggests that the Russian economy expanded by 1.8% y/y in the first quarter, up from 0.9% y/y in Q4

    Looking ahead, we expect the pace of expansion to slow in most countries in Emerging Europe over the remainder of this year and into 2019.

  • Russia is the exception to this story of slower growth. Despite the recent turmoil in local markets caused by US sanctions, we think that the cyclical recovery will strengthen in the coming quarters.
  • While our forecasts generally lie below the consensus in Emerging Europe, we expect GDP growth in Russia to surprise to the upside.

9 May 2018 – Oil hits 3-1/2-year high after U.S. quits Iran deal – Reuters

Oil prices rose more than 3 percent on Wednesday, hitting 3-1/2-year highs, after U.S. President Trump abandoned a nuclear deal with Iran and announced the “highest level” of sanctions against the OPEC member.
Ignoring pleas by allies, Trump on Tuesday pulled out of an international agreement with Iran that was agreed in late 2015, raising the risk of conflict in the Middle East and casting uncertainty over global oil supplies at a time when the crude market is already tight.

  • Iran re-emerged as a major oil exporter in 2016 after international sanctions against it were lifted in return for curbs on its nuclear program, with its April exports standing above 2.6 million barrels per day (bpd).
  • That made Iran the third-biggest exporter of crude within the Organization of the Petroleum Exporting Countries, behind Saudi Arabia and Iraq.

8 May 2018 – Putin says Russia to diversify its state reserves – Reuters

Russia will diversify its international reserves further, President Vladimir Putin said on Tuesday.
“The monopoly of the U.S. dollar is not reliable enough, it is dangerous for many,” Putin told Russia’s lower house of parliament.
Russia held 45.8 percent of its reserves in U.S. dollars as of Jan. 1, 2018, the central bank data showed last week.
The central bank also holds other currencies in state reserves, which last stood at $460.4 billion. A significant part of the reserves is held in gold.

4 May 2018 – Amundi Still Likes Russian Bonds as Sanctions Sell-Off Overdone

“Fundamentals look solid and the market probably overreacted to the sanctions due to a generally overweight position,” Yerlan Syzdykov, co-head of EM fixed income at Amundi says in research note.

  • Maintains “constructive” stance on Russian fixed income market, prefers sovereign, quasi-sovereign issuers, financials
  • Strategists at the fund manager say ruble is fairly valued at ~61-62/USD vs. 63.4 on Friday; say currency will remain a “shock absorber” of political risk
  • Remain constructive on Russian stocks although risk of sanctions will remain an overhang

3 May 2018 – Ruble Is `Best Buy’ in Emerging Market Dip: Standard Chartered

“An EM recovery from here is likely to be about what has sold off the most,” Geoff Kendrick, emerging-markets strategist at Standard Chartered, says in research note. “That is the ruble.”

  • Says high-yield EM is flashing “cheap”
  • Sees factors that drove “brutal” April for EM FX easing amid “marginally dovish” Fed meeting, diminishing trade tensions, strong tech earnings
  • “So long as oil is not hit hard should President Trump extend the Iran deal, we think the ruble is the best buy in EM right now”

27 Apr 2018 – Russian central bank signals rate cuts still on the cards, despite ruble sell-off – Capital Economics

Russian central bank (CBR) put a stop to monetary easing following five consecutive cuts in interest rates after the latest round of U.S. sanctions jolted the ruble and raised risks for inflation.
The decision to leave the policy rate unchanged at 7.25% was correctly anticipated by most analysts.

According to Capital Economics: “the dovish tone of the accompanying statement supports our view that rates are likely to be lowered further over the rest of 2018. The market’s response to this month’s currency sell-off – it removed almost all expectations for monetary easing over the coming year – seems like an over-reaction.
While there is a growing chance that the policy rate won’t be lowered as far as our current forecast of 6.00%, we think it is premature to change our view. And the key point is that rates are likely lowered further than the markets are now pricing in. Markets had expected 75bp of cuts over a six-month period before the ruble sell-off; they are now pricing in just one 25bp cut in a year’s time.”

26 Apr 2018 – Retail account for 37% of Russian equity volume

  • Individual traders are behind about 37 percent of equity volumes and 7 percent of currency turnover.
  • The Moscow Exchange opened 250,000 new day trading accounts for citizens last year, taking the total to almost 1.4 million.
  • On April 9, the first trading day after the U.S. updated its blacklist of Russian oligarchs and companies, the Moscow Exchange registered 4,000 new clients, four times more than normal.

25 Apr 2018 – World Cup claimed to boost Russia’s economy by nearly $31B – The Associated Press

This summer’s World Cup could have a total impact on the Russian economy of nearly $31 billion, organizers predicted Wednesday.
A new report on the economic impact of the tournament said the boost for the country’s GDP could amount to between 1.62 trillion rubles ($26 billion) and 1.92 trillion rubles ($30.8 billion) over the 10 years from 2013 through to 2023.
That’s attributed to growing tourism plus large-scale spending on construction, plus later knock-on effects from those government investments. It even suggests the World Cup will encourage Russians to exercise more, so they take fewer sick days.
The World Cup “has a considerable economic effect,” Deputy Prime Minister Arkady Dvorkovich says in the report. “The tournament has already boosted the economic development of the host regions and will continue to have a positive long-term economic impact.”

20 Apr 2018 – Don’t Buy Russia’s Stocks—Buy Its Bonds – Barron’s

Investors have good reason to remain cautious on Russia. The latest sanctions stretch wider and deeper than the measures the U.S. and European Union imposed after the Kremlin’s 2014 invasions of Ukraine.

Barron’s named Sberbank one our favorite emerging market stocks for 2017 based on rising oil prices and the expectation for better relations with the U.S.; the shares have since risen 31% (“Our 2017 Picks: Russia’s Sberbank and Mexico’s Cemex,” Dec. 17, 2016).
A rebound of that size from a steep decline could happen again, but Russia’s sovereign debt looks like a better, safer bet than the country’s equities right now. In part that’s because of the uncertainties surrounding the new sanctions. On the other hand, Russia is much better armored against financial attack than four years ago.
Investors should be on more solid ground with Russian sovereign bonds, which ironically seem better protected than private companies from sanctions provoked by actions of the Russian state.
That leaves the underlying credit story, which is that Putin has been obsessed with macroeconomic probity since his scarring experience renegotiating Russia’s Soviet-era debt in the early 2000s. If the Kremlin didn’t default in 2014, it won’t default now. Yet yields on its Eurobonds are in the 5.2% range—about the same as those of its less-proven ex-subject, Azerbaijan—while ruble bonds known as OFZs pay around 7.5%. Ashmore’s Dehn recommends a bet on these, given the support the ruble should get from rising oil abroad and vanishing inflation at home. Servicing on overall Russian debt (see table) will decline in the next year or so.

Buying emerging market bonds isn’t straightforward for retail investors. But Moscow-based Da Vinci Capital launched a London-based exchange-traded fund in February, the ITI Funds Russia-Focused USD Eurobond UCITS fund (RUSB.UK). Or you could try the Raiffeisen Bond Fund RU fund, which is listed in Moscow (RAIFBND.Russia). Moscow’s credit isn’t more solid than Washington’s yet, but it’s more solid than it might seem.

17 Apr 2018 – Fitch assessed the risks of Russian banks against new US sanctions

The international rating agency Fitch does not expect “any direct impact on the ratings” of Russian banks due to US sanctions imposed on April 6.

  • Fitch’s Russian-rated banks are able to absorb potential losses associated with loans and bonds of individuals and companies against which new sanctions have been introduced, the agency said. Most of these banks do not have significant risks on these counterparties, and banks with a significant volume of such risks have good collateral or sufficient profitability before provisions for impairment to cover potential losses, say Fitch experts.
  • Among the banks rated by the agency are Sberbank, MKB, Sovcombank, VEB, Gazprombank, Rosselkhozbank, Alfa-Bank, Tinkoff Bank, Citibank, Rosbank, UniCredit Bank and Raiffeisenbank.

17 Apr 2018 – Sberbank Proposes Higher Dividend Payout After Surge in Profit – Bloomberg

Sberbank PJSC’s board proposed a dividend payout of 36.2% of last year’s profit, up from about 25% in 2016, as the Russian government seeks higher financial contributions from state-backed firms.

  • Russia’s biggest bank will pay 271 billion rubles ($4.4 billion), or 12 rubles per share, from last year’s record profit, Chief Executive Officer Herman Gref told reporters after a supervisory board meeting on Tuesday.
  • The government is pushing state-owned companies to boost dividend payments, but faces fierce opposition from the politically powerful executives who run them. Sberbank last year paid a quarter of its 2016 profits, up from 20% the previous year, and has promised to raise the payout to 50% by 2020.

16 Apr 2018 – Trump Declines To Add Sanctions Against Russians

President Trump rejected, for now at least, a fresh round of sanctions set to be imposed against Russia on Monday, a course change that underscored the schism between the president and his national security team.

9 Apr 2018 – Russia’s sanction sell-off and the economic impact – Capital Economics’ view

The US sanctions imposed on Russia last Friday have caused turmoil in Russia’s markets today and financial conditions have tightened as a result. But at this stage it doesn’t look like there will be a significant impact on growth in the economy as a whole.

  • More generally, even if the US continues the sanctions squeeze on Russia, it seems reasonable to think the economic hit will be limited by Russia’s relatively strong external position. After Western sanctions were first imposed in 2014, major Russian firms became locked out of global capital markets and had to repay external debts. That caused pain at the time – resulting in slower growth and a weaker ruble – but external debts are now significantly lower than they were at their peak in 2014.
  • Meanwhile, Russia has continued to run current account surpluses and has a large positive net international investment position. This should soften the blow from financial sanctions – indeed, there are reports that the Russian authorities are already looking at ways of helping those individuals and
  • Our measure suggests financial conditions in Russia have tightened today, but only to the (loose) levels seen earlier this year.

7 Apr 2018 – Russia and China lay stress on closer ties as they hit out at America’s ‘unilateralism’ – Bloomberg

China and Russia have denounced what they described as America’s unilateralism as both sides sought to flag up their increasing rapport.
They have pledged to deepen their political and military ties at a time when Moscow is facing international isolation over the poisoning of a former spy and his daughter in Britain, and China is becoming embroiled in a tit-for-tat over trade with the US.
Chinese State Councillor and Foreign Minister Wang Yi visited Moscow this week for talks with his Russian counterpart and both sides used the opportunity to criticise the US while highlighting their closer military and political cooperation.

6 Apr 2018 – US imposes sanctions against Russian oligarchs and government officials

The Trump administration is unleashing additional sanctions against seven Russian oligarchs with ties to President Vladimir Putin along with 12 companies they own or control.
The measures announced by the Treasury Department on Friday were also aimed at 17 senior Russian government officials and the state-owned Russian weapons trading company, Rosoboronexport.

3 Apr 2018 – Russia Ready to Discuss Long-Term Work With OPEC at End-April – Bloomberg

Russia is ready to discuss mechanisms of long-term cooperation with OPEC at ministerial meeting planned for end of April in Jeddah, Energy Minister Alexander Novak tells reporters on plane from Moscow to Ankara.

  • Russia open to discussing all forms of cooperation with OPEC, has no plans to join organization
  • Saudi Crown Price Mohammed bin Salman told Reuters in March OPEC seeks 10-20-year cooperation with Russia
  • Russia’s Compliance With OPEC+ Deal Was 93.4% in March

27 Mar 2018 – Europe’s Biggest Money Manager Is Still Bullish on Russia – Bloomberg

Europe’s largest asset manager is tuning out noise from a deepening diplomatic spat and holding on to a big overweight in Russian bonds and the ruble. Sergei Strigo, the head of emerging-market debt and currencies at Amundi Asset Management, says he “doesn’t see any reason” for the rising geopolitical tensions to damp his bullish view on Russian assets. He took part in the government’s $4 billion Eurobond sale, which came one day after the U.K. blamed Russia for poisoning an ex-spy on British soil.
“We still like Russia as an investment opportunity,” Strigo said from the London offices of the $1.8 trillion asset manager. “With oil prices at these levels, macroeconomic indicators in Russia remain very strong.”
Strigo says he’s watching the situation closely but is much more focused on macroeconomic indicators, such as the Russian central bank’s gradual approach to monetary easing and the rising price of oil. Restrictions imposed on Russia over its annexation of Crimea don’t prevent investors from buying government bonds.
“As long as sanctions don’t impact investing in Russian assets in general, then there is no change,” Strigo said. “We have been overweight Russian assets for a while, that’s a view we are sticking with.”

26 Mar 2018 – Russian diplomats expelled across US and Europe

The United States and its European allies are expelling dozens of Russian diplomats in a co-ordinated response to the poisoning of a former Russian spy in the UK. More than 20 countries have aligned with the UK, expelling more than 100 diplomats.

23 Mar 18 – Russia’s Central Bank cut interest rates to 7.25%

The Bank of Russia cut the key rate by 25 bps to 7.25%, as widely expected. The accompanying statement reiterated the Bank’s view that the disinflationary factors that have helped to reduce inflation recently will be persistent. It also suggested that the transition to a “neutral” monetary stance
(which it has suggested means a policy rate of 6-7%) “will” be complete this year. Last month’s statement had indicated that this transition “may” be complete by the end of 2018.
Capital Economics’ kept their forecast that policy rate will be lowered to 6.00% by the end of this year.

19 Mar 2018 – Russian election results – Capital Economics’ view

With almost all the votes now counted, Putin has won 76.7% of the vote, the best result in any of the four presidential elections in which he has participated. Turnout, which was also seen as a gauge of Putin’s support, was a little better than in 2012.
The focus will now turn to the appointment of a new cabinet, which may provide clues about both policy direction and succession plans after Putin (possibly) steps down in 2024. Any announcements of amendments to this year’s budget may signal a shift in fiscal policy, which had been hinted at prior to the election.

16 Mar 2018 – RTS Index Rebalance

On Friday 16th March, RTS index had the quarterly rebalance:
X5 Retail Group (FIVE RX), a food retailer company, was added to the index with a 1.1% weight.
According to VTB Capital X5 Retail’s GDRs may be included in May into MSCI Russia, if its average daily volumes top $2.7MM.

Top 3 index holdings are: Gazprom (14.3%), Lukoil (14.1%), Sberbank (13.0%).

The ITI Funds RTS ETF (RUSE.L) has been rebalanced accordingly.

16 Mar 2018 – Russia sold $4bn in debt on the Eurobond market in London

About 170 global investors submitted $7.5bn bids in Russia’s eurobond placement on Friday, according to VTB Capital, the sole lead manager and bookrunner.
$2.5bn Russia 2047 5.25% Eurobond, buyers were from:

  • 49% UK
  • 20% US
  • 13% Russia
  • 3% Asia
  • 14% other regions

$1.5bn Russia 2029 4.625% Eurobond, buyers were from:

  • 35% Russia
  • 34% US
  • 22% UK
  • 9% other regions including Asia

Sale signals Kremlin can still raise cash in western markets, despite sanctions.

15 Mar 2018 – ITIEURBD Index Rebalance

On Thursday 15th March, ITIEURBD index had the quarterly re-balance:
PGILLN 5 ¼ 02/07/23 Corp and ALFARU 7 ¾ 04/28/21 Corp were added to the index. GPBRU 4.96 09/05/19 Corp was deleted, being left with maturity below 18 months.

Current index offers 4.6 years duration, 5.8% weighted coupon and 4.2% yield to maturity.

ITI Funds Russia-focused USD Eurobond ETF (RUSB.L) has been rebalanced accordingly and holds 23 securities.

13 Mar 2018 – World Cup Seen Boosting Russian GDP Growth, Ruble – Nordea

Soccer fans may contribute $2.5b-$4b to internal consumption, resulting in 1-2% private consumption growth y/y in 3Q, according to Nordea.

  • “We expect moderately positive effects on consumption, balance of payments and the ruble”
  • World Cup will help Russia avoid current account deficit in 3Q; Nordea predicts 2% strengthening for ruble, as much as 0.3% additional GDP growth for 2018
  • Economic effect of the World Cup in June-July will be most visible for retailers, restaurants, hotels

12 Mar 2018 – The EU extended individual sanctions against the Russian Federation for six months – Reuters

The European Union on Monday announced the extension of six months of individual sanctions against a number of Russian citizens and companies imposed due to the annexation of Moscow by Crimea and the support of separatists in the conflict in eastern Ukraine. The sanctions, which include restrictions on entry to the EU and the freezing of assets of 150 individuals and 38 companies on the blacklist, will be extended until September 15, the Council of the European Union said.

12 Mar 2018 – Ruble Is Top Pick for $25 Billion Investor CIBC Asset Management Inc. After Czech Bonanza – Bloomberg

“Investors are generally overestimating the risk of U.S. and international sanctions on Russia,” Luc de la Durantaye said. “The ruble has one of the highest carry and real rates in our 32-currency universe. Russia also has a current-account surplus, which is helpful in a rising U.S. rate environment.”
A recovering economy and climbing oil prices that offset the drag from international penalties mean the ruble is 30 percent undervalued versus the dollar, according to de la Durantaye. He also thinks the ringgit should be trading 17 percent stronger, even though Wells Fargo Securities LLC last week named it as the currency most sensitive to a potential trade war.

6 Mar 2018 – Russian CPI: Inflation unexpectedly fails to quicken from record low

Russian inflation figures for February (2.2% y/y) confirmed that underlying price pressures remain weak and another cut in the central bank’s policy interest rate at the next Board meeting (23 March) is almost certain. Barclays predicts a 25bps cut in policy rate. Capital Economics has penciled the same cut, but sees if anything the risk of a 50bp reduction.

1 Mar 2018 – Russian GDP Seen Growing 1.5%-1.8% Y/Y in 1Q – Bank of Russia

Investment activity growth resumed in January, supported by “easing of borrowing terms” and improvements in investment plans of industrial companies, Bank of Russia says in report on economy.

  • Central bank expects industrial output will continue to grow in February-March after annual 2.9% increase in January, but at slower pace.
  • Consumer activity will continue to grow in 1Q amid further salary increases, including in public sector.

27 Feb 2018 – S&P upgrades ratings of several Russian companies

S&P raised the credit ratings of several Russian companies, including Gazprom (from BBB-to BBB) and Russian Railways (for foreign currency obligations have been raised from BB+ to BBB-), following the increase in the Russian sovereign rating.
The outlook for all ratings is “stable.”

27 Feb 2018 – Time to shorten duration of bond portfolio – BCS research

In light of the flattening of Russian sovereign Eurobonds’ curve, as well as corporate and bank issues, BCS is recommending to shift from long-term issues to medium-term ones, as the shrinking premium in duration does not compensate for market risks.

  • Macro in the Russian Federation will continue to improve, preventing expansion of spreads
  • Raising ratings may lead to an increase in the inflow of passive money into sovereign issues
  • Decreasing yields on the domestic market increases the attractiveness of Russian Eurobonds
  • US Treasury yield growth potential – reason for decreasing duration
  • RUSSIA 23 and RUSSIA 28 – favorites among sovereign issues
  • Corporate and banking issues follow the dynamics of sovereign Eurobonds

23 Feb 2018 – S&P raises Russia ratings, lifting it out of junk territory

S&P Global Ratings raised its foreign currency long-term and short-term sovereign credit ratings on Russia to ‘BBB-/A-3’ from ‘BB+/B’.

  • The rise in the ratings is a reflection of Russia’s policy response which lets the economy adjust to lower commodity prices and international sanctions.
  • Steps taken by the Russian central bank have maintained financial stability.
  • The country’s strong net external asset position, low government debt and comparatively high monetary flexibility support the rise in the ratings.
  • Russia’s economic recovery is expected to continue through 2021. S&P projects Russia’s GDP growth rate to rise to 1.8 percent in 2018.
  • International sanctions and geopolitical tensions will continue to restrict Russia’s trend growth and attempts to diversify the economy due to investor uncertainty.
  • S&P does not see a notable decline in the state’s role in the Russian economy with a “high centralization of power” in the country.
  • S&P expects macroeconomic stability after the Russian presidential elections in March.

23 Feb 2018 – Fitch reaffirmed Russia’s investment grade level with a Positive Outlook.

The Positive Outlook reflects continued progress in strengthening the economic policy framework underpinned by a more flexible exchange rate, a strong commitment to inflation-targeting and a prudent fiscal strategy. This policy mix is contributing to improved macroeconomic stability and, together with robust external and fiscal balance sheets, increases the economy’s resilience to shocks.

  • Russia will record a fiscal deficit of 0.6% in 2018 (outperforming the budgeted 1.3% deficit), reflecting higher-than-budgeted oil prices, continued non-oil and gas revenue growth and expenditure restraint.
  • Russia’s general government debt ratio declined to 15.5% of GDP in 2017, among the lowest in the BBB investment grade category.
  • International reserves rose to $433 billion in 2017, reflecting capital inflows, higher-than-budgeted oil prices leading to a higher current account surplus and increased gold holdings.

21 Feb 2018 – Credit rating reviews by S&P and Fitch on Friday may be a catalyst for further inflows – Credit Suisse

In Russia, credit rating reviews by S&P and Fitch on Friday (16 February) may be a catalyst for further inflows. Out of the two rating reviews the spotlight will be on S&P which currently attaches a positive outlook to its BB+ (foreign currency) and BBB- (local currency) ratings. An upgrade of the foreign currency credit rating would make Russian hard currency bonds eligible to reenter the Barclays’ Global Aggregate Index and lead to forced buying as a result. By contrast, an upgrade of the local currency rating (either by S&P or by Fitch) would have no index impact at this stage, but might trigger inflows from non-index investors.

14 Feb 2018 – Russia Back From Junk Could Bring $2 Billion Eurobond Inflow – Bloomberg

Russian Eurobonds may see more than $2 billion of inflows if the nation wins back an investment-grade credit score this month, according to Societe Generale SA. S&P Global Ratings is due to review Russia’s sovereign rating on Feb. 23 as investors including Amundi Asset Management predict it’s only a matter of time before the world’s biggest energy exporter is lifted out of junk. Russia’s foreign debt is still rated investment grade at Fitch Ratings, meaning an upgrade by just one other agency would make it eligible for inclusion in the global benchmarks that international funds follow, such as Bloomberg Barclays and JPMorgan Chase & Co. indexes.

14 Feb 2018 – Early signs that Russia’s recovery is getting back on track – Capital Economics

Russia’s economy slowed over the second half of 2017, but the latest data for January suggest that conditions have improved at the start of this year. We expect growth to strengthen over the coming quarters and, indeed, our 2018 GDP growth forecast of 2.5% is above the consensus.

12 Feb 2018 – OPEC upgrades oil demand forecast amid strong global economy – OPEC

Global demand for oil will grow faster than expected this year, the Organization of the Petroleum Exporting Countries (OPEC) said on Monday, pointing to healthy economic growth around the world. “This close linkage between economic growth and oil demand is foreseen to continue, at least for the short term.”
The Vienna-based group now expects demand for crude oil to rise by 1.59 million barrels per day (bpd), an upward revision of 60,000 bpd from its previous monthly market report.
Oil production outside the OPEC will expand by 1.4 million barrels a day in 2018, about 250,000 a day more than the cartel projected last month.

12 Feb 2018 – Foreign Holdings of Russia’s government Eurobonds Rise in December – Bank of Russia

Share of Russian government Eurobonds, held by foreign investors, increased to 37.9% in 4Q from 36.6% q/q

9 Feb 2018 – Russian central bank opens door to more cuts over 2018 – Capital Economics

The Russian central bank’s 25bp cut in its policy interest rate (to 7.50%) today was smaller than we had anticipated, but the decision was accompanied by a very dovish statement that paves the way for significantly more easing this year. We remain comfortable with our forecast for the policy rate to be lowered to 6.00% by the end of the year, which is lower than the markets are pricing in.

5 Feb 2018 – Foreign Investors View Russia More Favorably in Poll – Kommersant

33% of international investors held positive view of Russian business climate in 2017, up from 23% in 2016, Kommersant reports, citing survey by FleishmanHillard Vanguard agency and Russian Union of Industrialists and Entrepreneurs (RSPP).
Respondents holding negative view of business climate fell to 22% from 53%, lowest level since 2013.
Survey involved more than 100 companies from the Fortune 500 list.

31 Jan 2018 – Germany Won’t Reconsider Russia Sanctions
for Now – Bloomberg

Germany Economy Minister Brigitte Zypries rules out reconsidering Russian sanctions unless government in Moscow sends a “signal” it will change policy.
Zypries says aware of German eastern state premiers urging government to ease sanctions.
Zypries says interested in maintaining dialogue with Russian government.

29 Jan 2018 – Moody’s upgrades rating outlooks on 9 Russian financial institutions – Moody’s

Moody’s on Monday affirmed the ratings of Sberbank, VTB, Gazprombank, Vnesheconombank, AIZhK, Roseximbank, State Transport Leasing Company, DeltaCredit and Rosselkhozbank and changed their outlooks to Positive from Stable.
The change in the outlook on Russia’s Ba1 government bond rating to Positive from Stable led to corresponding changes in the outlooks on the local currency deposit, debt, issuer and corporate family ratings of nine Russian financial institutions” the agency said.

6 Dec 2017 – A guide to Russia election in 2018 – Capital Economics view

The Emerging Market election calendar is busier than it was in 2017 but, whereas elections this year boosted the prospects for economic reforms in some EMs (e.g. Argentina), the likelihood that elections in 2018 produce similar positive shifts is lower. The focus in the early part of the year will be on Russia. The economy is unlikely to be a major theme of the presidential election in March but attention will gradually shift to what happens post-Putin and jockeying among rival factions could have significant economic and market implications.

What to watch for:

  • Putin likely to win, only question is by how much.
  • Economic policy unlikely to be major election issue. Risk of fiscal expansion ahead of election low but likelihood of reformist shift post-election equally low.
  • Repeat of street protests that followed 2012 vote possible but less likely given crackdown on dissidents.
  • Attention will increasingly focus on what follows Putin (constitution bars him from serving more than two consecutive terms). Possible for market disruption as rival Kremlin groups vie for power.

WHY INVEST IN RUSSIA?

Rising oil prices, a drop in inflation, and strong GDP growth have helped Russia to emerge from a recent recession with better economic prospects than it has seen since before the global financial crisis. With stocks in the country remaining remarkably cheap despite offering some of the most attractive dividend yields in the developing world, Russia’s market is fast becoming an increasingly pivotal part of any savvy emerging market investors’ portfolio. This year has seen the end of a two-year recession for Russia. This began in 2014 when its currency - the ruble - collapsed as a result of sanctions imposed by the US government alongside a global drop in oil prices to less than $30 a barrel. In March 2015, during the worst throes of this recession, Russia’s central bank was forced to raise interest rates to as high as 17pc in order to protect its currency as inflation hit an eye-watering 16.9pc. Since then, Russia’s inflation has declined dramatically, hitting a historic low of 2.7pc in October this year, well below the government’s target of 4pc. In line with this, Russia’s government has allowed interest rates to fall back to 8.25pc, with many expecting further cuts in the near future. With the help of stabilising crude oil prices, which have returned to more than $50-a-barrel since the recession, Russia’s GDP growth has also bounced firmly back into positive territory in 2017. Indeed, in the second quarter it hit 2.5pc, its fastest rate in nearly five years. Russia’s government remains confident that GDP growth will come in at least 2pc for the whole of 2017 before extending to 2.5pc next year. Its stock market - the RTS - was among the top emerging market performers last year, delivering impressive dollar returns of 50pc. It has continued to rise in 2017. But with markets failing to account for these economic improvements in their valuation of the country’s markets, shares remain highly discounted; the economist, Robert Shiller recently claimed that Russia has one of the lowest price-to-earnings ratios in the world, at around half that of its emerging market peers. In the final quarter of last year, Russia received a welcome boost as a result of the election of Donald Trump as US president. With Trump in tow, many felt that sanctions introduced in 2014 as a result of Russia-Ukraine crisis were much more likely to be lifted, and shares soared. Although relations between Russia and the US remain frosty for now, many have pointed to the country’s recent decision to make the ruble a floating rate currency as an effort to properly open up to foreign investment. The nation is throwing more weight behind structural reform. A particularly interesting development came in April, when its government demanded that state-owned companies pay out half of their profit in dividends this year. Although the move was chiefly driven by a need to cover the federal budget, it also came as a boon to private investors in affected companies. Perhaps coincidentally, the move falls in line with a general trend of increasing Russian dividend payouts in recent years. Since 2014, dividends on a $100 dollar investment have risen from around $2.5 to $3-4, making the country one of the most lucrative hunting grounds in the world for income investors.

What’s next?

With more than half of the RTS index comprised of oil companies and Russia itself currently positioned as a leading exporter of natural gas, the country’s short-term outlook is likely to remain relatively stable if analysts’ expectations of a broadly flat oil market are correct. But now that the days of $100 oil have passed, an alternative way of getting exposure to the country’s large dividend yields can be found in its increasingly wealthy population and jump in consumer spending. With inflation currently in a trough and low interest rates turning consumers away from saving, household spending increased by 4.3pc in the second quarter of 2017, while retail sales have snapped out of a record 27-month period of contraction and rose to near-three-year highs. When a 150-million strong population decides to spend more on luxury goods, services and holidays, the beneficiaries will be sectors such as housebuilding, retail, and air travel rather than commodities. A particularly effective way of gaining exposure to this trend while remaining part of the country’s commodity narrative is through an exchange traded fund (ETF) which directly invests across the whole Russian stock market. By exposing themselves to both commodity and non-commodity stocks, investors can potentially cash in on more than one investment trend while limiting downside risk in the event of another drop in oil prices. With much of Russia’s growth story yet to fully pan out, a diversified exposure to the country’s market trends as they continue to develop is the perfect way to cheaply broaden income streams within a wider emerging market portfolio.

PROS

  • HIGH Dividend yields
  • LOW Valuation
  • HIGH Commodity exposure
  • GOOD Diversified economic growth
  • LOW Debt exposure

CONS

  • EM Volatility
  • US Sanctions

Important Information:

The value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Compared to more established economies, the value of investments in Emerging Markets may be subject to greater volatility due to differences in generally accepted accounting principles or from economic or political instability. Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events. Overseas investments will be affected by movements in currency exchange rates.

DISCLAIMER

We’ve designed this website to give you clear information to help you make informed investment decisions. We don’t offer investment advice based on personal circumstances. If you are unsure whether the products mentioned on this site are suitable for you, please speak to a financial adviser. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall or rise and you might get back less than you invested.