Investors reacted to disputes between Russia and USA over Syria

Risks of investments in Russia are growing on the background of aggravation of relations with the United States over the conflict in Syria. Since the beginning of October the cost of insurance against default (CDS — credit default swap) is increasing. According to Bloomberg, the five-year CDS traded on Monday, October 10, at the level 222,31 b.p. at the beginning of the month the price was 217 b.p.

The negative reaction of investors affected the market of sovereign Eurobonds. The issue of “Russia-2026” (maturing in 2026) is trading with a yield of 3.8%, the price of these bonds in October fell by 1 percentage points to 107,37%. And the cost of Eurobonds “Russia-2042” (yield 4.7%) and decreased from the beginning of the month by 2 percentage points to 113.9%.

“Investors react to the aggravation of contradictions between Russia and the United States regarding the settlement of the military conflict in Syria,” explains portfolio Manager UK “TKB investment partners” Igor Kozak.

On Friday, 7 October, the head of U.S. state Department John Kerry urged to investigate the actions of Russia and Syria as a war crime. As an example, the Secretary called strikes on Syrian hospitals, which, according to him, the cause Moscow and Damascus. Earlier, White house spokesman Joe Ernest said that Washington does not exclude the use of military force against the government troops in Syria to resolve the situation in Aleppo.

Monday, October 3, the US announced the termination of cooperation with Russia on Syria. But the defense Ministry said it is considering the possibility of a return of military bases in Cuba and Vietnam — the countries where such bases located in the Soviet Union. October 1, the Ministry of defense reported that Russia also plans to deploy in the Syrian port city of Tartus naval base, which will operate on a permanent basis.

In addition to concerns related to geopolitics, growing expectations of investors regarding the increase in the key rate of the Federal reserve system (FRS). “The probability that the fed will raise rates in November, increased to 64%. A week ago, the rating was at 45%. As a result, the yield of US treasuries since the beginning of October increased by 18 b.p. to 1.71%,” — said the head of Department of debt tools “Aton” Konstantin Glazov.

He also notes the decline in demand of non-residents on the OFZ. “Shopping, there is almost no market, the trading volume is very small, so the yield of government securities grew a little,” says Glazov. In particular, since early October the yield on ten-year OFZs increased from 8.07 to 8.25%. Index of government bonds on the Moscow exchange for the week from 3rd to 10th of October, down from 407 to 405,2 points.

ING economist Dmitry Polevoy, in his review writes that those investors who invested in Russia in the first half, has accumulated an impressive profit, where fixing to the main wave of sales is part of a successful strategy. “Sellers are hedge funds, this class of investors usually ahead of the mainstream market,” writes Field.

“It is too early to talk about a major correction, but if geopolitical tensions, investors will more actively sell Russian assets, which could have an impact including on the ruble,” — said Kozak. While the ruble is supported by high oil prices and demand in the local market. “The market is still considerable supply of currency by exporters, which does not significantly weaken the ruble”, — stated in the review of Sberbank CIB.

The analyst of “Finam” Bogdan Zvarich believes that the ruble debt market remained relatively stable, as after a meeting of OPEC member countries in Algeria investors expect growth of cost of oil. “Rising oil prices could spur a new round of strengthening of the ruble. From this point of view BFL is more interesting than Eurobonds, especially for Russian players, who earn on the carry trade (playing on the difference of rates in foreign currency and rubles),” — said the analyst.

Zvarych believes that in the case of a strong strengthening of the Russian currency investments in Eurobonds can bring a loss. “It is possible that this is why some investors decided to lock in yield,” he suggested.

According to Sberbank CIB, per week (28 September-5 October), the funds focused on Russia, increased its investments by $28 million, and global funds invested in Russian assets $52.6 million As an analyst at Sberbank CIB Cole Axon, the positive dynamics in the categories of active and in-country funds focused on Russia, may signal the emergence of demand for Russian assets. In this case it is based not only on the oil factor.

The last time negative reaction of international investors on the geopolitical events in Russia was associated with the worsening of relations between Russia and Ukraine. After reports that President of Ukraine Petro Poroshenko ordered to bring in the enhanced combat readiness all units to the border with the Crimea, the cost of five-year CDS on Thursday, August 11, increased by 14 b.p. to 231 b.p. The ruble and the stock market hardly reacted to the events in the Crimea. For comparison, one of the maximum values of the five-year CDS fell on “black Thursday” — December 16, 2014, the value reached 578 b.p.