By Jason Webb and Ilya Arkhipov - Aug 11, 2010 6:53 PM GMT+0800
Moscow’s bonds are rallying to a record high as optimism in the capital’s finances outweigh concern that a heat wave may trim Russian gross domestic product because of spreading fires and drought.
Gains in the city’s 407 million euros ($533 million) of notes due in 2016 reduced the yield to 4.63 percent, the lowest level since they were issued in 2006, from 18 percent two years ago, according to data compiled by Bloomberg. The yield on Moscow’s three-year ruble debt fell to 25 basis points, or 0.25 percentage point, above Russian government bonds, the smallest spread in at least 14 months, from 196 in May, the data show.
Even as HSBC Holdings Plc predicts Russian GDP may drop by $15 billion because of the record heat, investor confidence in Mayor Yuri Luzhkov’s administration is growing. Increased receipts from corporate taxes will help revenue top the budgeted amount by at least 50 billion rubles in 2010, enabling the city to borrow 40 billion rubles less than the 146 billion rubles planned, city Debt Committee Chairman Sergei Pakhomov said.
“We still have a small yield spread, which I think will continue to shrink if the economy and revenues normalize despite all these natural disasters,” Pakhomov said in an interview yesterday in Moscow. Without the fires “we might have got 100 billion rubles in extra revenues, but we’ve definitely got 50 billion,” he said.
Residents Flee
Hundreds of thousands of residents have fled the city this month to escape smoke from fires across central Russia. Record heat may already have taken 15,000 lives as fires and drought ravage the country.
At least 7,000 people have probably died in Moscow as a result of the heat, and the nationwide death toll is likely to be at least twice that figure, according to Jeff Masters, co- founder of Weather Underground, a 15-year-old Internet weather service that gathers information from around the world. While smoke cleared in Moscow today as the wind shifted, the smog is likely to return by the weekend and remain in the city because of an absence of wind, Rossiya-24 reported.
The heat wave may slice 1 percent off of Russia’s $1.5 trillion economy this year because of lower agricultural output and reduced activity in other areas such as industry, Alexander Morozov, chief economist at HSBC in Moscow, said in an e-mail.
Moscow, Russia’s capital and largest city, earns income per capita three times the national average, according to Fitch Ratings. The city’s revenues exceeded spending by 19 percent last year, according to Fitch.
Overseas Sale
Revenue from Moscow-based companies increased as OAO Sberbank, Russia’s biggest bank, reported first quarter net income 75 times higher than in the same period last year. VTB Group, the second-largest lender, reported profits of 15.3 billion rubles compared with a loss of 21.4 billion in the first quarter of 2009. State-owned oil producer OAO Rosneft said Aug. 2 that second-quarter net income attributable to shareholders rose 54 percent to $2.48 billion.
Moscow’s government plans its first international bond sale since 2006 next year to refinance securities due in 2011. The administration may offer 500 million euros of bonds next year maturing in seven to 10 years, Pakhomov said. The government last sold ruble bonds in April and plans its next local debt issue in September, Pakhomov said.
“Local investors like Moscow city bonds,” said Alexander Ovchinnikov, a vice-president of global markets in Moscow at Troika Dialog, Russia’s oldest investment bank. “The spreads are quite tight versus the government bonds” because of the decision to delay additional sales, he said.
Falling Yields
Moscow’s local currency debt is rated Baa1 by Moody’s Investors Service, the same rating assigned to the Russian government. Standard & Poor’s rates Moscow’s long-term local currency debt BBB, one step beneath the BBB+ for Russia.
The yield on Moscow’s ruble bonds due 2013 rose to 6.44 percent today, down from 8.89 percent on May 7, data compiled by Bloomberg show. The yield on ruble-denominated Russian government OFZ bonds due in 2013 rose to 6.17 percent, down from 7.06 percent in the same period.
Russia, the world’s largest producer of oil and gas, is recovering from a record 7.9 percent contraction in 2009, the steepest recession since the collapse of the Soviet Union in 1991. Higher oil prices and rising domestic spending helped lift GDP 5.4 percent in the second quarter, according to Deputy Economy Minister Andrei Klepach.
Mexico, Brazil
Prime Minister Vladimir Putin’s government sold $5.5 billion of bonds in April, marking its return to world capital markets for the first time since Russia defaulted in 1998. The yield on government dollar bonds due in 2020 rose 1 basis point to 4.619 percent yesterday, 1 basis point above the lowest level since they were sold in April.
The government has raised about 24 percent of the maximum 1.2 trillion rubles budgeted from domestic bonds for 2010.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose 2 basis points to 222, according to JPMorgan’s EMBI+ indexes. The difference compares with 137 for debt of similarly rated Mexico and 190 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
The yield spread on Russian bonds is 40 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 rose 3.5 basis points to 156.7 on Aug. 10, down 49 from July 1, according to data compiled by data provider CMA. Credit-default swaps 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.
Ruble Weakens
Russian credit-default swaps are 3 basis points cheaper than contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s Investors Service. That difference has narrowed from 40 basis points on April 20.
The ruble lost 0.6 percent to 30.2252 per dollar today. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble at 30.4227 per dollar in three months.
Demand for Moscow’s bonds has been helped by central bank rules that allow the securities to be used as collateral in repurchase agreements, according to Paul McNamara, who oversees about $3.5 billion of emerging-market bonds at Augustus Asset Managers Ltd. in London.
Changing Rules
The agreements are short-term loans made to banks by the central bank and are currently offered at lower interest rates than the yields on bonds used as collateral, meaning banks can borrow the money and make a profit on the difference between the Bank Rossii rate and the note’s yield. The central bank offered overnight repos at a minimum rate of 5 percent in an auction on Aug. 9.
The rules on collateral were changed in February 2009, allowing bonds including those issued by state-owned gas monopoly OAO Gazprom to be accepted in repo operations.
The yield on Gazprom ruble bonds coming due in 2018 is below the rate on government OFZ notes maturing in the same year. The Gazprom bonds traded at 5.588 percent versus 7.19 percent for the OFZ on Aug. 10, the last day they both traded. Gazprom local currency debt is rated the same as Russia’s government by both S&P and Moody’s.
Moscow and Gazprom bonds are easier to trade than OFZ bonds for international funds wanting to invest in ruble assets because trading the government securities requires registration with the Moscow Stock Exchange, said Kieran Curtis, who helps oversee $2 billion at Aviva Investors in London.
“The process of buying them is administratively easier than buying the OFZs,” said Curtis.
To contact the reporter on this story Jason Webb in London at jwebb25@bloomberg.net.
From Bloomberg published on Aug 11, 2010 6:53 PM GMT+0800