In January, Russian local non-government bonds optically outperformed the sovereign curve, as spreads to the OFZ curve in the high-grade segment have tightened near 30-40bp YTD to around 100-110bp, close to record lows for the last couple of years. However, we think this is a technical phenomenon, as liquidity in the local non-government debt space worsened dramatically in January, and so price action and adjustment were rather limited, as local banks – the main holders of the local non-government debt – are reluctant to book losses. That is quite typical behaviour for Russian banks, behaviour that we have witnessed a few times during periods of market turmoil (one of the most vivid recent examples is the sell-off in autumn 2011 spurred by the US downgrade). Meanwhile, we highlight Russian RUB-denominated Eurobonds have traded more actively, so at the moment the average spread pick-up in Eurobonds vs. local peers is around 80bp.
Thereafter, we reiterate our view that although all Russian local debt is Euroclearable starting this week, there would be no significant inflow of foreign money into the local non-government debt, as it is more attractive to buy Eurobonds now. However, we do not rule out that some investors might be interested in select high yield stories in the Russian local market, especially, the names not represented in the international market.
Maxim Korovin, Anton Nikitin
VTB Capital analyst
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