Russian Stocks Snap Three Days of Gains on Crude, European Debt

Russian Stocks Snap Three Days of Gains on Crude, European Debt

By Jason Corcoran

Dec. 16 (Bloomberg) -- Russian stocks slid for the first time this week as oil declined amid renewed concern that Europe’s debt crisis may hamper the global economic recovery and curb demand for commodities.

OAO Lukoil, Russia’s second-biggest oil producer, dropped as much as 0.8 percent. OAO Severstal, the country’s largest steelmaker and OAO Sberbank, its biggest lender, both dropped by at least 0.4 percent, helping to push the 30-stock Micex index 0.3 percent lower to 1,665.17 by 10:55 a.m. in Moscow.

Oil, Russia’s main export earner, fell 0.5 percent to $88.16 in New York. European Union divisions widened over how to contain a debt contagion threatening the euro ahead of a summit starting today meant to find agreement on a crisis-management mechanism that takes effect in 2013.

“Concern over Spanish debt, and euro zone debt in general, has again halted the global market rally,” said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, in an e- mailed report today.

Copper on the London Metal Exchange dropped as much as 1.2 percent. Nickel, lead and aluminum also declined on the London Metal Exchange. OAO GMK Norilsk Nickel, Russia’s biggest miner, lost 0.7 percent.

To contact the reporter on this story: Jason Corcoran at Jcorcoran13@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

Last Updated: December 16, 2010 03:07 EST

Floating-Rate Debt Favored as Inflation Quickens: Russia Credit

By Emma O’Brien

Dec. 16 (Bloomberg) -- Traders are stepping up bets Russia will begin lifting borrowing costs from record lows to stem inflation, spurring gains in debt linked to central bank rates and losses on fixed-rate bonds.

OAO Transneft ruble notes due in 2019 with a coupon tied to Bank Rossii’s one-year repurchase rate jumped 7.1 percent since the central bank last reviewed target borrowing costs Nov. 26. Similar-maturity debt issued by the pipeline operator paying a fixed rate dropped 1 percent, data compiled by Bloomberg show. Notes due in 2013 from IK Strategia, a Perm-based investment company, that are tied to the refinancing rate surged 31 percent in the period versus a 34 percent drop in similar maturity fixed-rate debt of food retailer OAO Magnit, the data show.

Traders are pricing in 73 basis points, or 0.73 percentage point, of rate increases in Russia over the next three months, the most in almost three weeks, forward rate agreements show. Russia’s year-on-year inflation rate rose for a fourth month in November, to 8.1 percent, the highest level since December 2009. In Brazil, the rate jumped to 5.63 percent, the highest level since February 2009.

“Anything linked to rates should be seen as a potentially good investment going into 2011 given the market is pricing in a greater likelihood of hikes,” Luis Costa, an emerging-markets credit strategist at Citigroup Inc. in London, said in a phone interview. “These kinds of bonds should have very good potential.”

After 14 cuts to key rates between April 2009 and May this year, Bank Rossii is “free” to tighten monetary policy “in case it’s necessary,” First Deputy Chairman Alexei Ulyukayev said in a Dec. 1 interview in London.

The central bank’s Chairman Sergei Ignatiev said last week that inflation is a “worry” and policymakers may control it by raising rates in the first quarter of next year.

‘Loved’ by Investors

Russia’s refinancing rate, currently at a low of 7.75 percent, will rise to 8 percent by the end of the first quarter, according to the median estimate of 19 analysts surveyed by Bloomberg before Bank Rossii’s Nov. 26 announcement. Russia doesn’t target one benchmark rate. The rate charged on overnight repurchase loans is 5 percent, while the deposit rate is 2.5 percent, both also at record lows.

Brazilian Floaters

“These bonds are loved by portfolio investors, but there’s few of them in Russia,” Dmitry Gritskevich, a fixed-income analyst at OAO Promsvyazbank, said in St. Petersburg last week. “Once our market grows more of these will develop.”

Bonds linked to official rates or consumer prices make up more than 60 percent of the Brazilian local-currency debt market, according to data from the Treasury. Fixed-rate real- denominated bonds accounted for 36.7 percent of total outstanding debt of 1.5 trillion reais, while inflation-linked bonds made up 28.4 percent and floating-rate securities with interest tied to the interbank rate, known as Selic, represented 33.3 percent.

Russia has just four bonds with so-called floating rates tied to either inflation or borrowing costs, and only a few with coupons that switch to official or money market rates after a fixed period, Bloomberg data shows.

Notes maturing 2014 of Moscow-based OAO Russian Railways tied to the one-week repurchase rate climbed to a three-week high of 103.45 on Dec. 14, while fixed-rate 2014 bonds have dropped 0.6 percent this month to 121.12 yesterday.

Question of Timing

Investors need to be convinced that interest rates are going to rise to buy bonds linked to official borrowing costs, said Dmitry Dudkin, head of fixed-income research in Moscow at UralSib Financial Corp.

“The problem is timing,” Dudkin said by e-mail Dec. 7. “For investors it’s not clear when exactly the rates go up and if they stay low for, say another 12 months, then the return on floaters will be noticeably lower than on longer-term bonds.”

The ruble was little changed at 30.66 per dollar at the end of trading yesterday. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, showed the ruble yesterday at 30.9668 per dollar in three months.

Russia’s dollar bonds due in 2020 rose yesterday, pushing the yield 3 basis points lower to 5.04 percent. The price of the country’s ruble notes due August 2016 rose for a second day, pushing the yield down 1 basis point to 7.69 percent.

Extra Yield

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose 3 basis points to 193 points yesterday, according to JPMorgan EMBI+ Indexes. The so-called spread compares with 125 for debt of similarly rated Mexico and 163 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The spread on Russian bonds is 33 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan Indexes.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was 142 basis points yesterday, down from this year’s peak of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade rating, cost 13 basis points less than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.

Developing Market

Bonds linked to inflation or interest rates will only take off once Russia moves to a real inflation-targeting regime that sets one benchmark rate, said Nikolay Podguzov, head of fixed- income strategy at VTB Capital, the Moscow-based investment banking arm of Russia’s second-largest lender.

Russia’s Finance Ministry has one federal bond, or OFZ, linked to the consumer price index. The 2018 note issued in 2004 has traded unchanged in December.

“As the central bank steadily moves towards inflation targeting and market participants gain more confidence that their monetary policy is more reliable then these bonds will become more popular,” Podguzov said by phone in Moscow on Dec. 8. “In order to successfully trade these bonds you need to have a good understanding of how to measure inflation expectations and we’re not quite there in Russia yet.”

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

Last Updated: December 16, 2010 01:37 EST