Fixed Income Comment: We expect Russia to open on a weaker tone with RU30 trading to a low of 1011/8 (+247 bps over UST)

Russian eurobonds weakened further yesterday as the ongoing uncertainty in
neighbouring Ukraine continues to impact risk appetite for both Russian and EM
debt. In response, the Russian EMBI+ spread widened a further 3 bps to reach
228 bps, and contributes to a 9 bps widening over the past week. With US
markets closed for Thanksgiving holiday few trades were executed, and activity
was confined to the benchmark RU30 which moved lower from an opening level of
1017/8 to close at 1015/8. With no trades witnessed across the ARIES curve or
corporates and banking sectors, most credits were marked lower accordingly in
line with the weaker sovereign curve. Although today is also expected to remain
low attendance, owing to yesterday’s US public holiday and absence of any
significant economic data releases, we expect Russia to open on a weaker tone
with RU30 trading to a low of 1011/8 (+247 bps over UST). Indeed, UST have
moved markedly lower this morning given the speculation that China is likely to
reduce it holdings of USD assets. Over the near-term we view Russian USD
denominated debt vulnerable to any protracted decline in the USD, which has
recently traded to a 4-year low against the RUB, and subsequent shift in sentiment
towards holding USD assets. At the same time, the market will continue to monitor
political developments in Ukraine and the opposing stance between Russian and
Western officials. On a positive note, Italian bank, UniCredito, is reportedly
considering the purchase of Rosbank, a move that would clearly prove positive for
the bank’s newly issued ’09 eurobond and also price supportive for similar Russian
banking credits, as evident in early morning buying interest.