Russia: where did all these foreign bond owners come from?

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Russia is worried about the level of foreigners owning its debt, it seems. According to Bloomberg, the head of the central bank’s financial stability department, Vladimir Chistyukhin, told reporters “We don’t consider the situation to be critical at this point… At the same time, we do see potential risks.”

Foreign investors at the start of July owned 30 per cent of outstanding debt – around 930bn rubles. That’s up from 7 per cent a year ago, and 21 per cent at the start of February. Which prompts the questions – should the bank worry? And what has sparked the increase?

To which the answers are: “No”, and “the central bank”.

Is 30 per cent a worry? Not when you consider that it is the average for emerging markets, according to UniCredit analysts. Perhaps if it rises to 50 per cent, that would be more worrying in terms of Russian debt being hit by global sentiment. For comparison, the share of foreign ownership of domestic government debt is 42 per cent in Hungary, 37 per cent in Poland, and 23 per cent in Turkey.

So why has the foreign level gone up? UniCredit suggest that it’s partly due to Russia being “a relatively bright spot in the CEE region”. But there is also a technical factor: Russian debt can now be bought through the international securities depositories Euroclear and Clearstream, a move that UniCredit describes as the government “actively courting foreign investment” – and it has the same plan for corporate bonds.

UniCredit added:

It is no surprise to see a sharp rise in foreign ownership and we suspect that this will stabilise from here. Third, foreign funds have been courted for good reason: investment has been far too low for too long.

Furthermore, the Russian sovereign debt market is small relative to GDP, but still relatively liquid – which makes it attractive.

But all that said, the increased share of foreign ownership does increase the risk to Russia in the event of an EM sell-off. “As a result the state and corporate bond rates become susceptible to foreign sentiment, as well as the ruble,” note UniCredit.

It does seem that Russia’s central bank forgot the old saying: be careful what you wish for.

Related reading:
Russia gives green light to stimulus programme, FT
Russian economic growth disappointing in second quarter
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Guest post: the Navalny case and Russian capital flows – what’s happening
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