Strong Currency

For the first time since 3/23, the Russian Ruble strengthened to close below 26 vs. the U.S. Dollar on Thursday. Undoubtedly our Ruble bond- holders are enjoying the moment, there will be additional moments like these to come as we see no immediate end to the Rubles strength in site. Corporate bonds denominated in Rubles increased over one Bln. USD from January to February and nearly 50% from August 2006. A vote of confidence not only in Russian fixed income, but in Russian companies in general, and in the Ruble as well.

Russia is looking for new markets.

Russian energy and metal sectors are among the areas of the Russian economy to benefit from a summit between the heads of Russia and China. The value of deals signed are in the billions. Metals will benefit not only from the large quantities that will be purchased directly by China, but China agreed to sell Russian steel as well so this can be worth ultimately even more. In the short-term energy will benefit from more oil China has agreed to purchase and a new pipeline’s construction is progressing as well. This bodes well for Russia in seeking to diversify energy exports away from Europe. Additionally, despite environmental concerns the gas pipeline underneath the Baltic Sea is progressing, hopefully limiting the number of days Russia will have to depend on Ukraine and Belarus for transport.

Short term investments

We are advising our clients to invest in instruments maturing in the six month to two year time-frame on certain sectors such as consumer and financial, although there are many exceptions to this rule, look at your own personal needs and specific opportunities. After conducting a study of the yield-curve, there is no advantage at the moment to go long on bonds. Firstly, of course there are worldwide events to consider that can influence developing markets. We feel these particular sectors provide competitive returns and will be safe, especially until the next elections. Government reserves and revenues look solid, and before elections, I doubt anything dramatic will be allowed to happen.

Dollar keeps falling. Good or bad?

Dollar went below 26 Rubles today. Most Russian analysts called a “big psychological event”; USD is not a “savings bond” in Russia. Russians want to get rid off dollars and replace it with Euro.

I would say it brings new opportunities for US and foreign investors to gain on a falling dollar to the addition of getting competitive bond yields.

Oil prices

Oil prices have declined, let the long-term investor should view this as something positive. Firstly, it shouldn’t have too much of an affect on Russian oil companies, most of their profits are so heavily taxed they won’t notice unless prices get too low. The Russian government will take a hit on revenue but they have already announced a decreased budget for next year, have over 100B USD in a rainy day fund, and a 300B USD surplus from their central bank. The next administration may alter export taxes to give energy the incentive to conduct additional exploration to replenish depleted fields. The Russian government may emphasize even more the importance of a diversified economy. Lastly, let us emphasize, we don’t believe oil prices should ever decline to a point where it becomes a crisis, just enough hopefully to where proactive steps are taken in the Kremlin. Let’s recognize it is better to have an economy that resembles Norway and Canada, rather than Saudi Arabia and Venezuela.

More centralization?

The Kremlin is consolidating more political and economic power. The Duma just passed a bill that will enable it to pass budgets on a three year basis rather than every year. There are also provisions that will give Putin, and those that follow him greater control in how the money is spent.

What happens on Russian Stock Markets?

The RTS is down nearly 15% since the stock market slide of a week ago, somewhat more if you go back a little further. We are not displeased and not surprised this happened, and not nervous. We predict it still has a little more to fall in the approaching weeks before calm returns and the upward march can resume at a slower pace. The markets were hit for a variety of reasons. A contagion that spread from China and other developing markets, an incredible year and past several years for the market, and pricey valuations for many leading Russian stocks relative to their international peers and relative to growth in earnings. Pay attention to the reasons that weren’t present. Firstly there has been no unexpected political turmoil to unsettle investors nor a run on the banking system, nor a collapse of the currency, in fact the currency is reaching all time highs. Key commodities like oil, natural gas, metals, and others have enjoyed stability at a high price relative to their historical values and show no sign of a collapse in the future. When the situation calms down there promises to be some rare buying opportunities. We’ll let you know when it is safe to dip your toe back in…keep checking back.

Turbulence on RTS

The RTS index is down over 10% in the last couple of days. We are viewing this as a unique buying opportunity in a fast growing developing market. People’s error has been to lump Russia in with other Developing markets that have grown at a much faster rate and don’t have the underlying fundamentals of basic materials and natural resources to draw from. Of course if you believe the downturn will be worldwide, long-term, and severe of course Russia would be affected as well, we do not view this is what is happening.