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Russian Eurobond market hit record highs in 2005

January 06, 2006 | Interfax

The Russian Eurobond market hit record highs in 2005 and it was one of the leaders in growth among emerging markets.

Russia made early repayments on its debt to the Paris Club of about $15 billion in 2005 and said it was ready to make more payments as the Treasury is seeing windfall oil profits, which led to a drop in country risks and three leading agencies assigned Russia a second-level investment grade rating.

The boom on the Russian Eurobond market was not hurt by the Federal Reserve Board's continuing policy to hike interest rates. Trust Investment Bank's Nikolai Podguzov expects that since the Fed is expected to stop raising rates in 2006, that this will cause a growth in interest for emerging countries.

Russia pulled in investors for all of 2005 because it was seen as a save haven among emerging markets and it will remain so in the next year, said analysts for Commerzbank AG.

According to the Merrill's Global Sovereign Broad Market Plus index, yield on Russian bonds denominated in U.S. dollars exceeded 13% in 2005.

The JP Morgan Chase & Co. EMBI+ Russia index shows that the spread in yield for Russian 2030 Eurobonds and 10-year US Treasuries dropped 107 basis points in 2005 to 115 basis points in December from 222 basis points in December 2004. The spread hit an all-time low on September 29, 2005, when it fell to 90 basis points. The spread only fell 24 basis points in 2004.

Prices for Russia 2030 also hit record highs in 2005. Prices jumped to 115.3% of face value at the end of September on expectation that Moody's would increase Russia's country rating and amid stable US Treasuries. Prices jumped 9.38 percentage points to 112.375% of face value on December 26, 2005 from 103% of face value in December 2004.

There will still be a slight potential in 2006 that the spread will fall against yield for US Treasuries, and the spread for Russia 2030 could be approximately 80-90 basis points by the end of the year, said Mikhail Lyamin, analyst for the Bank of Moscow.

Commerzbank's Paul Timmons said in an annual report on countries with developing economies that he expects that, along with a stabile political situation and unprecedented support from fundamental macroeconomic indicators, there will be a splash on the Russian market amid other emerging markets.

The outgoing year was "very successful" and the spread could fall to 70 basis points in 2006, said Artur Arakelian, bond analyst at MDM Bank.

"This was one of the best years in history for emerging markets," Metallinvestbank's Selim Agarzayev told Interfax.

"The forecast is traditionally positive for the market. We are waiting for growth, but, not as strong, of course, as this year," he said. Only some sort of global economic cataclysms could hurt the development of the market, he said.

The "tooth" spread has reached 55-60 basis points, Agarzayev said.

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