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Red Flags Over Russian Ruble One Year After Crimea Seized

Ksenia Galouchko

(Bloomberg) -- For Ram Capital SA, Russia remains off limits for investment a year after President Vladimir Putin orchestrated the annexation of Crimea from Ukraine.

As the conflict deteriorated, the Swiss money manager cut its 20 percent Russian debt allocation, the maximum allowed, to close to zero. That’s where it is still amid concern over the lack of predictability in the nation’s politics, according to Ogeday Topcular, a Geneva-based money manager at Ram, which oversees $250 million in emerging-market debt.

“The damage is big,” Topcular said by e-mail on Wednesday. “The unknown is big. Trying to pinpoint what Russia will do next in the Ukraine conflict is anybody’s guess. So to change investors views towards Russia would take a long time.”

 

While the ruble, local-currency debt and dollar-denominated bonds have surged this month, offering among the biggest gains in emerging markets, investors such as Ram, GAM UK Ltd. and Rogge Global Partners Plc say they’re in no hurry to pile back into Russia assets. Risks remain as the European Union and the U.S. threaten new sanctions, oil trades almost 50 percent below last year’s peak and Moody’s Investors Service and Standard & Poor’s cut the nation’s debt to junk.

‘Rogue State’

On March 3, 2014, the first trading day after unidentified troops locked down key facilities in Crimea, Russia’s central bank raised interest rates by 150 basis points in an emergency move to stem a slide in the ruble. The incursion, which followed the ouster of Ukraine’s pro-Russian President Viktor Yanukovich in a bloody uprising in Kiev, paved the way for the annexation of the peninsula, which is home to Russia’s Black Sea Fleet.

It’s been downhill since then for Russian assets as the U.S. and European Union ramped up sanctions amid spreading separatist unrest in eastern Ukraine.

“Russia is less seen as a BRIC now as something approaching a rogue state, where political considerations enter the decision-making process,” Paul McNamara, a money manager who helps oversee $6.3 billion of debt including Russian Eurobonds at GAM, said by e-mail on Wednesday, referring to Brazil, Russia, India and China. “The risk premia attached to holding Russian debt has risen across the board but most in the local market.”

Since February last year the ruble is the worst-performing currency globally after Ukraine’s hryvnia with a 42 percent decline versus the dollar. Investors took a 48 percent loss in dollar terms in the period on Russia’s local debt, the worst emerging market in a Bloomberg index.

Shriveling Issuance

Western banks balked at organizing bond deals and foreign-currency issuance by companies shriveled 71 percent to $12.6 billion last year, the least since 2009. Ruble sales dropped 31 percent to $34 billion, the lowest since 2011, data compiled by Bloomberg show.

The slump in placements prompted some banks to sniff out deals outside the local market. Andrey Solovyev, global head of debt capital markets at VTB Capital in Moscow, the investment-banking arm of Russia’s second-largest lender, said he’s been able to offset the dearth of Russian deals by looking to Asia, Eastern Europe and Africa as well as the former Soviet republics, including Kazakhstan, Azerbaijan, Georgia and Belarus.

“By working with different types of transactions in different markets, we’re able to completely compensate the income that we had earlier received from Russian company placements,” he said by e-mail on Thursday.

Staying Away

Even bearish investors didn’t rule out boosting holdings. Topcular, who maintains a 1-2 percent exposure to Russian corporate Eurobonds, says he sees opportunities in company debt. GAM’s McNamara re-entered Russian Eurobond investments in December, lifting the weighting of the nation’s debt in his portfolio to market-weight. Still, he’s staying away from local notes after selling all of them in March.

The ruble rallied 12 percent in February, on course for the best month on record, as oil rebounded and a cease-fire that went into effect this month showed signs of holding. The nation’s ruble borrowing costs are still almost six percentage points higher than they were at the end of February last year.

The ruble weakened 1.3 percent to 61.93 as of 7:14 p.m. in Moscow.

The yield on Russia’s March 2030 dollar bond surged 24 basis points after Moody’s joined S&P in rating Russia below investment grade, citing the Ukraine crisis and weaker oil prices. While Brent crude, the benchmark used to track Russia’s main oil grade, has recovered 35 percent since touching a six-year low of $45.19 on Jan. 13, it’s still down from a June high of $115.71.

“Our exposure in Russian assets is now much lighter and the Russian credit story is not an easy call anymore as a consequence of sanctions and the oil price drop,” Michael Ganske, the head of emerging markets at Rogge in London, said by e-mail on Wednesday. “The log-out of Russian issuers from the market is problematic.”

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