Attraction of Russian, as well as foreign, bond investors


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(EM) Starting next year, foreign investors will be able to buy and sell Russian ruble-denominated Treasury bonds, the so-called OFZ, through Euroclear, the world’s biggest bond settlement system.

Analysts have said the move is likely to attract strong interest from foreign investors, which are expected to pour tens of billions of dollars in the market.

Currently, non-residents make up under 7% of the Russian domestic bond market, much less than in other emerging markets in the region; in Hungary, nearly 50% of investors in the country’s domestic bonds are foreigners, in Poland nearly 40%, Turkey has about 25% and Romania, nearly 10%.

Alexei Moiseev, deputy finance minister of the Russian Federation, said the domestic market needs to deepen at the same time, to avoid increased volatility caused by fast-moving foreign capital flows.

“It’s not that I prefer domestic investors, it’s that the presence of a powerful domestic investor base makes the market significantly deeper,” he said in an interview on the sidelines of a conference in London. “What we’re doing now is open up the market completely for foreign investors. We want to do both.”

“What has happened in the Russian markets in the past years is that, for example, in the equity market over half of investors are foreign-based. And the Russian market is a very peripheral market for a lot of foreign investors and this … has resulted in the Russian markets being so volatile,” Moiseev added.

Russian stock markets have been hit by quick withdrawals of capital by foreign investors over the past few months. Last month, Reuters data showed that trading volume in the stocks that comprise the benchmark MICEX index fell 58% compared with October 2011 to $21 billion, the lowest since early 2009 when the global financial crisis hit Eastern Europe.
“Really, you have to have a significant domestic investor base which is anchored domestically to make the market an attractive way to raise capital,” Moiseev said.


Officials and experts present at the London conference on opportunities for investment in the Russian bond market said the country was acting to make investing in bonds as attractive as investing in other asset classes.

“The main competitor for the debt market in Russia is the real estate sector,” Alexander Afanasiev, chairman of the Managing Board and CEO of the Moscow Exchange, said, noting that those who bought property and held on to it for at least 3 years were exempt of tax when eventually they re-sold it.

“The same rule will be introduced for the debt market,” Afanasiev said.

He also said disclosure and governance standards were improving and pension funds will enter the debt market due to new legislation, which will make it even more attractive to investors.

Moiseev said Russia would have a balanced budget this year but despite that, the government has still issued bonds, just to maintain volume on the debt market.

“We are intending to continue the policy of issuing OFZ bonds even in the context of a balanced budget,” he said.

He added that the focus should be on issuance in the domestic currency rather than on foreign currency denominated debt as this can be “dangerous,” especially for economies dependent on commodity prices such as Russia.

The high dependence on oil exports has been one of the main issues analysts quote when asked about their concerns regarding Russia’s economic prospects.

Moiseev said measures, such as cutting the non-oil and gas deficit by 1.5 percentage points in about 5 years, were being taken to reduce the effect of volatile oil prices on the budget.
Tagged as: Russia Russian bond market foreign investors ruble debt market OFZ emerging markets bonds

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