Russia: Fully Priced?

Mid Week Bond Update

Russia: Fully Priced?

After strong returns in recent years, what's next for Russia's bonds and the ruble?

Despite being at the center of some of the world’s most contentious political issues, Russia has been kind to U.S. dollar-based fixed-income investors.

The Russian ruble has appreciated some 8.8% since the beginning of 20191 and has risen some 15% since January 2016, when it plummeted in reaction to tightened economic sanctions. Also, since January 2016, the yield on the Russian 5-year government bond has fallen from a high of about 10.9% to 6.25%.

Russian Ruble and 5-Year Government Bond Yield, Oct 21, 2014 – Oct 22, 2019

Source: Bloomberg. Past performance is no guarantee of future results.  This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


These moves are in part due to markets’ recognition of greatly improved fundamentals, according to Brandywine Global’s Alberto Boquin.  Russia’s central bank acted resolutely in 2014, hiking rates to as much as 17% in the face of the first sanctions, which occurred during a period of record declines in the price of crude oil, the country’s leading export and source of foreign exchange.  Stability in energy prices in the intervening years has contributed to a strong balance of payments, which has boosted the country’s reserves, giving it the ability to increase fiscal stimulus as its key export markets, especially Europe, experience yet another slowdown.

But as always, the real question for investors is whether the improvements are coming to an end in the face of a possible global slowdown.  With much good news already reflected in currency and bond markets, the answer remains to be seen.

On the rise: EM debt and currencies

Over the past six weeks, EM bonds and currencies have generally seen positive returns with local currency results stronger than U.S. dollar returns. That’s in part due to 18 of 24 EM currencies tracked by the Bloomberg World Currency Ranker rising versus the U.S. dollar. Top five gainers were the Mexican peso (+4.27%), Russian ruble (+3.88%), Polish zloty (+2.46%), Taiwan dollar (+2.38%) and Korean won (+2.19%).2

Despite uncertainty about global growth conditions, it’s certainly possible that the Fed’s recent dovish pivot and signs of slowing US growth outperformance are constructive for EM financial conditions, and that yield-seeking flows could be supportive of dollar-denominated EM sovereign debt. Those inflows could allow EM central banks to lower rates and support economic activity, which could be especially supportive of EM local-currency debt, due in part to appreciation of EM currencies vs. the dollar.

On the slide: Australia bank rates

The Reserve Bank of Australia (RBA) has reduced rates three times since June after almost three years on the sidelines and has maintained an explicit easing bias.

Growth has slowed in Australia, but the housing market may have bottomed, with prices rising after almost two years of declines. The wealth effect from a turnaround in housing may help improve the lackluster contribution to GDP growth from the consumer over the past year or so. Though very strong, jobs growth has failed to keep pace with record labor force participation over the past year, resulting in a small rise in the unemployment rate, one of the key indicators the RBA has openly continued to target in its rate-setting deliberations. It’s therefore possible that yields could continue to fall as monetary-led economic improvements continue.


Note: The year for all dates is 2019 unless otherwise indicated.

1 Source: Bloomberg. Results are for the Russian ruble vs. the U.S. dollar, Jan 1, 2019 – Oct. 22, 2019. Unless otherwise indicated, all data are on as of close of trading ET, October 22, 2019.

2 Source: Bloomberg for period of 8/31/19 – 10/15/19



The Russian ruble (ruble) is the currency of the Russian Federation (Russia).

A balance of payments, or current account balance summarizes the flow of goods, services, income and transfer payments into and out of a country

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.


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