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Comment by Andrey Solovyev, Global Head of DCM at VTB Capital, for Bloomberg

4 October 2012
HSBC Right in September Sees Higher Rates in 2012: Russia Credit


Maria Levitov (Bloomberg)

HSBC Holdings Plc, one of only three banks that predicted Russia would raise interest rates last month, says borrowing costs are going up again before the end of the year.

While HSBC’s Alexander Morozov agrees with most economists in a Bloomberg survey saying Bank Rossii will hold the refinancing rate at 8.25 percent tomorrow, he expects an increase of at least a quarter percentage point by year-end.

Policy makers lifted key rates by 0.25 percentage point last month to curb accelerating inflation, diverging fromcounterparts in Brazil, India and China, which have cut borrowing costs this year to revive economic growth.

“It’s most important for the central bank to signal they are worried about inflation,” Morozov, chief economist for Russia at HSBC, said by phone from Moscow yesterday. “A stop- and-go policy makes more sense” for interest rates, he said. 

Traders anticipating a pause in rate increases sent one- year interest rate swaps down 17 basis points from the peak since the Sept. 13 policy decision, according to data compiled by Bloomberg. Equivalent contracts in Brazil and China both rose 12 basis points in the period. Yields on government ruble bonds due in June 2017 sank 32 basis points to 7.48 percent since Sept. 19.

Previous Increase

Bank Rossii raised the refinancing rate for the first time in 16 months and also increased the overnight repurchase rate by a quarter point to 5.5 percent and the overnight deposit rate to 4.25 percent last month. Consumer prices, spurred by food costs, advanced 6.3 percent from a year earlier as of Sept. 10, above the central bank’s 5 percent to 6 percent target this year, the regulator said at the time. 

Goldman Sachs Group Inc. and Societe Generale SA’s Russia unit, OAO Rosbank, also expect the refinancing rate to rise to 8.5 percent by January after predicting last month’s advance, according to Bloomberg surveys.

Bank Rossii doesn’t rule out raising interest rates or keeping them unchanged tomorrow, First Deputy Chairman Alexei Ulyukayev said at a Moscow investment forum on Oct. 2. “Inflationary risks are higher” than the threat of an economic slowdown, he said.

Economy Slips

Gross domestic product growth slowed to an annualized 4 percent in the second quarter from 4.9 percent in the first three months of this year as manufacturing, retail and extraction of natural resources slowed, the Federal Statistics Service said Sept. 7.

“The economy went from a sweet spot at the beginning of the year to a tough spot,” Neil Shearing, chief emerging- markets economist at Capital Economics Ltd., said by telephone from London. “It’s going to be a close call tomorrow,”

The ruble weakened 0.4 percent to 31.2010 by the 7 p.m. close in Moscow yesterday. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 31.6780 per dollar in three months.

Gains to Russia’s sovereign dollar bonds due in April 2020 cut the yield five basis points, or 0.05 percentage point, to 2.63 percent. Russia’s ruble Eurobond due in 2018 declined, pushing up the yield 13 basis points to 6.34 percent.

Russia’s borrowing costs rose at an auction of 15-year ruble-denominated notes yesterday by eight basis points compared with the previous sale of the notes on Sept. 12. The Finance Ministry sold 18.6 billion rubles ($598 million) of debt at an 8.22 percent average yield after offering 25 billion rubles of
the notes, according to a statement.

Local Market

The government needs to ensure the local debt market is “up and running” by providing more liquidity rather than lifting the cost of borrowing, Andrey Solovyev, global head of debt capital markets at VTB Capital, said in an interview in Moscow yesterday.

“As a person responsible for debt capital markets, I definitely hope that we won’t see many more rate increases this year,” he said.

Russia is rated Baa1 by Moody’s Investors Service, the third-lowest investment-grade ranking. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell four basis points to 197, according to JPMorgan’s EMBIG index.

The difference compares with 163 for debt of similarly-rated Mexico and 150 for Brazil, which is rated one step lower at Baa2 by Moody’s.

Protection Cost

The cost of protecting Russian debt against nonpayment for five years using credit-default swaps declined three basis points to 139, data compiled by Bloomberg show. The contracts cost 11 basis points less than for Turkey, which is rated three levels lower at Ba1 by Moody’s. The swaps pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

“There is room for an increase” and rates are set to go up by at least a quarter point by the end of the year after staying unchanged tomorrow, HSBC’s Morozov said.

Russia can afford another rate increase this year as the risk of a recession isn’t high unless oil prices plummet to about $80 a barrel, Vladimir Kolychev, head of research at Rosbank in Moscow, said by phone yesterday.

Russia gets about 50 percent of its revenue from oil and gas, according to the Finance Ministry. Urals crude, Russia’s main export blend, declined for a third straight day, falling 0.8 percent to $108.64 a barrel yesterday.

“The central bank would want to see growth stabilize before another increase,” Kolychev said.

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