Russian credit prices were volatile at the end of a week that saw a further round of sanctions from the US and EU, as well as a court ruling on Yukos Oil that said Moscow had to stump up US$50 billion to its former shareholders as compensation for appropriating the company's assets.
Surprisingly, there was a big outperformance of Russian risk in the immediate aftermath of more targeted sanctions by the West but bonds were widening again on Friday amid a general correction across global financial markets.
Still, the initial relatively sanguine response from investors to the latest penalties was eye-catching. "The lack of a more aggressive sell-off perhaps reflected a 'sell the rumour, buy the fact' kind of reaction, as Russian markets have underperformed for some weeks now," said Tim Ash, head of EM ex-Africa research at Standard Bank.
In particular the state-owned banks, which bore the brunt of the sanctions, saw their bonds quoted tighter on Thursday.
For example, VTB, one of the financial institutions named by both the US and EU in their latest list, saw its 6.551% due 2020 notes trade 25bp tighter on Thursday, although the bonds are still 170bp wider than they were in mid-July.
"The cynic in me says that Putin has just given the word to go and start buying and supporting the prices," said one trader in trying to explain the moves. "But I guess the sanctions weren't as severe as they could have been."
Yet with Russia's financial sector trading 20bp wider on Friday, others argued the market was simply catching up. "The question for me is not why [Russian credits] are weaker today," another trader said. "I was more surprised that they performed better over the two previous days."
The volatility in prices and spreads is likely to continue with investors watching the market closely to take advantage of attractive valuations. At the same time, with liquidity even more sparse than usual because of the holiday season, small orders are likely to exaggerate price movements either way.
"It is perhaps better now to view Russia as a trading, rather than investment, asset," said Ash. "It is, simply put, too difficult to determine with confidence longer-term trends. Short-term value can perhaps be seen over a short-term perspective of weeks, but not really over the longer term."
The fear is that even more sanctions could be rolled out that not just halt primary market activity but also secondary trading. For the moment, authorities in the US and EU have stopped short of banning the trading of any Russian debt or equity.
Instead, this week's sanctions were a gradual tightening of penalties already announced. The EU, for example, copied a previous round of US sanctions in prohibiting certain banks from selling debt or equity of longer than 90-days' maturity to investors. The banks sanctioned were Sberbank, VTB, Gazprombank, Vnesheconombank (VEB) and Russian Agricultural Bank.
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