Putin’s Sell-Treasuries-for-BRICS Bonds Plan Has Limits

By Ksenia Galouchko  

Photographer: Chris Ratcliffe/Bloomberg

Russia is considering investing cash into bonds issued by BRICS members and should move... Read More

Russia’s more than $400 billion of foreign reserves pose a challenge for President Vladimir Putin as he seeks to diversify holdings away from U.S. and European bonds and buy more debt of the largest emerging nations.
The country’s two sovereign wealth funds manage some $177 billion of the reserves, compared with about $47 billion for the euro and dollar-denominated debt markets of Brazil, India, China and South Africa, which make up the remainder of the BRICS grouping, data compiled by Bloomberg News show. There are more than $12 trillion of Treasuries (BUSY) in circulation, offering unparalleled liquidity even as yields begin to rise in anticipation of higher Federal Reserve interest rates.
“Russia’s reserves are too large” relative to these emerging-market dollar bonds, Richard Segal, the London-based head of international credit strategy at
Jefferies International Ltd., said by e-mail on Sept. 25. “It will be difficult for Russia to stop buying U.S., European and Japanese bonds.”
The world’s biggest energy exporter is considering investing cash into bonds issued by BRICS members and should move money away from countries that imposed sanctions as punishment for its role in the Ukraine crisis, Finance Minister Anton Siluanov said Sept. 20. The conflict, stemming from President Vladimir Putin’s annexation of the Crimean peninsula in March, led to penalties that have hurt trade and threaten to send Russia’s $2 trillion economy into a recession.

Not Eligible

The $91.7 billion Reserve Fund (RURFUSD) can invest between 50 and 100 percent of its assets in foreign government bonds, while the National Wellbeing Fund can choose to allocate between zero and 100 percent of its $85.3 billion, according to the Finance Ministry’s website.
BRICS debt is currently not eligible for either fund, which can only buy bonds from developed nations, including the U.S., U.K., France and Canada. The notes must be denominated in dollars, euros or pounds sterling, and their rating shouldn’t be below AA- from Fitch Ratings or Standard & Poor’s or Aa3 from Moody’s Investors Service. The size of the issues shouldn’t be less than $1 billion, 1 billion euros ($1.27 billion) or 500 million British pounds ($815 million).
Brazil and South Africa are both rated BBB- at S&P, while India is at Baa3 at Moody’s and China is AA- at S&P, according to data compiled by Bloomberg. The BRICS group approved the creation of a new currency reserve fund and development bank on July 15 at their summit in Brazil.

Russian ‘Posturing’

The ministry plans to clarify BRICS Eurobond investment rules for the Reserve and National Wellbeing funds before year-end, Deputy Finance Minister Sergey Storchak said in an interview with ITAR-TASS on Sept. 22, carried on the ministry’s website. They have been looking for alternatives to AAA-rated bonds and the “public mood doesn’t favor holding reserves in the bonds of our traditional issuers,” he said, according to the transcript.
Russia’s bond-diversification plan “sounds like a lot of posturing,” Luis Costa, the head of foreign-exchange and local-market strategy for central and eastern Europe, the Middle East and Africa at Citigroup Inc., said yesterday by e-mail. The size of its sovereign-wealth funds is a “massive issue,” he said.
The funds are managed as part of the central bank’s foreign-currency assets. As of Dec. 31, when the last breakdown was published, the cash pile stood at $468 billion, of which 45 percent were denominated in dollars, 41 percent in euros, while 84 percent were government bonds. A breakdown of wealth-fund assets hasn’t been made public.

Minimizing Risks

Treasuries have returned 3.8 percent this year, underperforming Brazil and South Africa’s dollar bonds, at 8.1 percent and 8.8 percent respectively, data compiled by Bloomberg show. Euro-region (BEUR) sovereign debt beat all of them, earning 10 percent.
“Sovereign wealth funds should be diversified as much as they could be to minimize the market and event risks,” Ogeday Topcular, a money manager at Ram Capital SA in Geneva, said by e-mail on Sept. 22. “It could be an option for Russia to allocate some money to invest in BRICS bonds, but of course the allocation should be calculated intelligently. The motive should not be only to run away from the countries who imposed sanctions.”
Penalties imposed on Russia have sent the nation’s assets tumbling, while the economy will expand by just 0.3 percent this year, according to a Bloomberg survey of economists, the slowest since shrinking 7.8 percent in 2009. Russian dollar bonds returned 1.7 percent in 2014 and the ruble slumped 15 percent against the U.S. currency. Russia’s exchange rate lost 1.2 percent to 38.9710 per dollar by 3:22 p.m. in Moscow.
“I don’t think that Russia’s investments in developed nations’ Eurobonds would ever be replaced or significantly reduced by any other instruments in the foreseeable future,” Oleg Kouzmin, an economist for Russia and the Commonwealth of Independent States with Renaissance Capital Ltd. in Moscow, said by e-mail yesterday.