Investment industry welcomes Russian bond market liberalisation

The liberalisation of the Russian bond market which is taking place at the moment was welcomed by panellists at the Moscow Exchange Group’s event in London yesterday.

The event “Russia’s Bond Market: Zooming In” brought together market participants from Russia and London-based financial firms to discuss the progress made by Russia this year in opening up its bond market to foreign investors.

The event came on the back of Russia’s National Securities Depository (NSD) finally gaining central securities depository status on November 6, after months of agitated waiting. This move will make it possible from now on to trade Russian bonds through Euroclear and other universal clearing houses.

Philippe Laurensy, regional director at Euroclear, said he is “not sure we all realise how important this event really is.”

The move will not only facilitate trading and make transactions for foreign investors far cheaper than they were before, it will also ensure foreigners have appropriate protection and asset servicing post trade.

Chris Kelly, managing director in the emerging markets debt team at BlackRock, says investing in Russian bonds has “always been a problem” for the team.

He explains that although Russia makes up around 6% in the JP Morgan’s government bond global emerging markets diversified index (GBI Global EM div), most of the issuance is dominated by the so-called OFZs (Russian Federal Loan Obligations).

As a foreign investors, BlackRock could not invest in these bonds. As a result, the manager was pushed to invest in “Euroclearable” bonds, which amount to merely 0.6% of the index.

Kelly says: “It meant that we were investing together with other people with the same risk profile as us, so we had no competitive advantage.”

“Euroclearable” Russian bonds were yielding up to 160 basis points less than rouble denominated bonds. Since they are denominated in US dollars, they are also riskier than bonds denominated in local currency, since a great deal of the local bond market is driven by the domestic investor.

BlackRock intends to participate in the opening up of the local bond market by increasing exposure to Russian bonds within the EMD portfolio.

The total assets under management represented by the GBI EM diversified index are around $200bn. Russia makes up 10% of this, amounting to $20bn of potential investment opportunities. This forms a significant part of the expected volume of issuance in Russian bonds.

For corporate bonds, this issuance is already up around 20%-25% this year. However, market practitioners see investors allocating to government bonds first, while corporates are expected to take longer to attract foreign flows.

But interest in Russia’s debt has been spiked by the recent developments. Mikhail Belyavsky, a bond trader at UBS, says “the market is hot right now”, with many people being long local Russian bonds.

As Euroclear takes all the necessary steps in the last few weeks of the year to set up smooth trading operations, it will open up the local bond market to a far greater pool of investors than those available through the Moscow Exchange Group.

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