Fixed Income Weekly: The Russian external debt market was wracked with nervousness last
week

External Debt

The Russian external debt market was wracked with nervousness last
week. The banking crisis and the uncertainty over the fate of YUKOS
caused concern among investors and prompted a sellBoff, with the
Eurobonds of banks bearing the brunt of the blow.
By far the worst development, though, was the news that Germany intends
to мmonetizeо more of Russiaнs debt to it via the Paris Club in only six
months (any earlier is not possible due to restrictions in the issue
prospectus). The news was carried by the German media, which also
reported that another EURO5 bln may be securitized and that France and
Italy might follow suit.
On Thursday, a representative of the German government who is in
Moscow with Chancellor Gerhard Schroder announced that more of the
Aries bonds would not be issued for another year at least. The statement
was an attempt to allay investorsн concerns and reassure them that a supply
increase is unlikely in the short term. However, it had the opposite effect:
players interpreted this as meaning that Germany is thinking seriously
about issuing more bonds soon. This triggered a major selling spree in both
the Sovereign and the corporate segments. Clearly, many investors view the
Aries bonds and other similar papers as being closer to nonBstate securities
than to Russian Sovereigns in terms of risk.
Next week, we expect prices to continue fluctuating. The excessively high
spreads of the Sovereigns over the US Treasuries (the Russia 30нs is 345
bps) might tighten.

Domestic Debt

This week has seen the ruble bond market react fairly sharply to the
growing crisis in the banking sector. The suspension of operations by Guta
Bank, an active player in the private deposit sector, and the rumors that
other large commercial banks face a similar fate hit ruble bonds hard.
Selling, even of the firstBtier papers, rocketed. This may have been partly
linked to the reduction of REPO transactions by some players or the
redirection of some of the investment flow into hard currency, which
pushed up the rubleBdollar exchange rate to R29.1B29.15/$1. The latter is a
traditional escape route for Russian players in a crisis situation. As a result,
yields shot up (in particular, the Gazprom 3нs rose above the 10.5% mark).
Interestingly, prices dropped on the back of high turnover and the main
buyers were foreign investors, who have evidently remained calmer about
the banking sectorнs problems.
Next week, the banks might receive the money from the mandatory reserve,
which could improve the situation on the market slightly, and prices might rise.