By boosting spending, the football World Cup in June should also help counterbalance the sanctions.
Russia’s strong position can also be observed in the corporate bond space. Russia index spreads, as represented by the JPM CEMBI BD Russia index, have only widened by c.60 basis points since the sanctions were announced.
We do not think that Russian eurobond prices will deteriorate significantly from the current levels because the original panic seems to have faded and the market is relatively small and shrinking, with limited scope for new supply. In fact, we believe demand from local investors will absorb any supply from forced US sellers, thus providing further support for the market.
In the same way as Russia is proving strong faced with the latest US sanctions, the country’s companies are showing resilience. Forced to decrease their reliance on western capital over the past years, we believe this trend will continue, despite many of them already having no debt at all.
We also think that they will continue to pay dividends which, in the case of some companies, are at extraordinary levels. As Fig.8 shows, Russian companies are already offering record high dividend yields. Unlike the previous crisis in 2015, both domestic firms and exporters are offering high dividend yields, indicating all parts of the market are attractive.
Looking at a broader set of 10 risk factors (e.g. excess debt, hard currency debt & FX reserves) shows that Argentina, Turkey, Colombia and South Africa would be other markets at risk. In fact, Argentina was recently forced to hike rates to 40 per cent to defend its currency, a 12.75 per cent rise in just a week.
A point to note is that unlike 2013, the largest emerging markets (BRIIC) seem much less vulnerable this time.
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