The Daily Update - No new western sanctions for Russia

The US Treasury department yesterday met its deadline to report on Kremlin-linked members and the impact of potential new sanctions. Using ‘objective criteria’, 96 Russian oligarchs and 114 political figures were identified and somewhat surprisingly, the Trump-administration announced that no further sanctions would be placed on these individuals, despite the 2016 US election-meddling allegations. The State Department did, however, highlight that the current legislation and the ‘mere threat of sanctions’ have acted as a deterrent, adding that foreign acquisition of Russian defense has been reduced dramatically; thus new sanctions need not be imposed.

This announcement follows Moody’s upgrade to its outlook for Russia's long-term rating to positive, last week. The uplift suggests that the rating agency could look to take the country’s rating back into investment grade territory at some stage. In its report, Moody’s commented on Russia’s  increased institutional strength, and improving economic and fiscal resiliency, which have reduced Russia’s vulnerability to geopolitical tensions and oil price volatility. The obvious challenges remain, however, these include: slow growth due to underinvestment, the sustained impact from international sanctions and ongoing geopolitical risks.

As regular readers are aware we have favoured hard-currency, quasi-sovereign bonds for some time; we currently hold Gazprom 2034s (USD) and 2024 (GBP) issues, along with state-owned Russian Railways 2031 (GBP) and VEB 2023 and 2025 (USD) across our strategies. Considered strategically important to the government of Russia, the bonds we hold in these state-owned companies have remained resilient through the sanction noise, compared with local credit and Russian sovereign bonds; which came under pressure ahead of the Treasury report.

These bonds also continue to offer attractive risk-adjusted returns; sterling issue RZD 7.487% 2031, for example, trades at a spread of 300bps over Gilts, ~150bps wider than similarly rated bonds with a duration of 8.8. The bond, therefore, offers over 13% expected return, a 4.7% yield and three notches of credit cushion. We continue to monitor our holdings, looking for rotation potential as our bonds near fair value. Currently, we are comfortable with our Russian holdings, which trade at an average yield of 4.5% and offer sufficient credit cushion.

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