In the last week, the Russian 10Y bond sold-off slightly by 4.5 bps as investors actively sold Russian sovereign debt. This came as a response to constitutional amendments passed last Wednesday which would keep Putin in power for another 16 years.The muted market response in the Russian bond markets highlights that foreign investors are actually quite comfortable investing their money in Russia whilst Putin is in charge. Russia’s relatively high interest rates have provided a stable carry-trade for many Emerging Market investors for many years. However, there is a slight fear in the Russian investment community that the Russian central bank will continue to cut rates and the carry-trade will cease to exist. Effectively, putting an end to the steady flow of free cash.
The carry-trade is an important financial vehicle used to invest in the Russian markets. 30% of Russian debt is actually held by foreign investors. If Russian rates which have been cut by 10% to 4.5% since 2015 continue to be cut and the US dollar remains weak vs other currencies. Russia may start to see some withdrawals from its debt markets and into other Emerging markets which are providing a better value for money.