Autumn glory: Russian bond market liberalisation

Russia has just enjoyed one of those rare summers where the weather was perfect and the markets kind, especially for investors in emerging market Eurobonds.

The rally is now moving to Russia’s local bond market, where more liberalisation, slated to take effect this autumn, will only add to the momentum.

Europe’s economies are slowing, but Russia is on track to deliver strong growth of 3.5-4.0% against 0.2-1.8% for developed markets.

At the micro level the picture is even better.

A recent visitor told me: “There were more people walking about lumbered down with heavy shopping bags, more queues of cars outside the shopping centres, the restaurants seemed busier and even the roof terrace of my favourite bar had been extended. The consumer was well and truly consuming.”

Consumption is once again driving economic growth – retail sales in the first half of 2012 grew 6.8% from the year before, while investment in the period rose even more, by 10.2%.

Compared to the rest of Europe, Russia is a beacon of vitality.

The strong performance of Russian Eurobonds is a reflection of the country’s strong fundamentals and a general re-pricing of emerging market assets. Thanks to low debt levels, emerging markets’ ability to pay off their debts far exceeds that of the developed markets.

For example, Russia’s debt to GDP ratio of only 8.4% is one of the lowest in the world and is beyond comparison relative to the global average of 60%.

However, this standout performance is not reflected on the Russian local bond market. Yelds on Russian ruble bonds remain amongst the highest in emerging markets (see chart).


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