Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Categorized | Capital Markets, Equities

Russia’s rehabilitation trade prompts delight and scepticism

Posted on November 28, 2016

There is no mistaking the delight with which investors in Russia regard Donald Trump’s ascension to US presidency.

And after more than two years near the top of the list of countries to avoid, international equity and bond traders are placing bets Mr Trump’s victory will not just improve ties between the historic adversaries, but facilitate Russia’s rehabilitation on the global stage.

“We’re seeing that with the rouble holding up, more money is looking at Russia,” says David Nangle, managing director at Vostok Emerging Finance, a private equity firm with stakes in several Russian companies. “It’s clearly good for Russia Inc whether you are a quality company or a less quality company. Everyone benefits.”

Still, campaign trail praise for Vladimir Putin and calls for a better relationship with Russia are only the start of a long road to ending economic sanctions imposed by Europe and the US following the country’s intervention in Ukraine in 2014.

Some investors and bankers are also sceptical warmer relations would do more than exacerbate existing trends in a country already helped by this year’s return of capital to developing markets.

“You’d see growth in fixed-income trading, which is growing anyway because Russia has such high yields compared to other emerging markets,” says a senior Moscow investment banker. “But it wouldn’t do much to equities because the fundamentals don’t really change.”

Russia’s problems have been compounded by the fact that as sanctions bit, the price for crude oil — the country’s key export — fell from more than $100 per barrel to less than $50 as global supplies outweighed demand. As foreign investment ground to a halt, the economy sunk into the doldrums.

The sanctions affect a range of companies in different ways. State banks and energy companies are currently banned from raising debt of more than 30 days’ maturity from western markets. Other bans exist on companies in Russia’s defence sector, dealing with the annexed Crimean peninsula, importing dual-use technology, and doing business with people blacklisted for their role in the Ukrainian conflict or closeness to Mr Putin.

Their existence also adds obstacles to investing in non-sanctioned Russian companies for overseas investors. Viktor Szabo at Aberdeen Asset Management says internal compliance required that every position in Russia be confirmed as a non-sanctioned asset.

Andrei Kostin, chief executive of state-run VTB, Russia’s second-largest bank, released a statement hours after Mr Trump’s victory saying he expected “new possibilities for restoring constructive relations between Russia and the US, [and] improving the geopolitical situation in general. If that happens, then we could soon see an easing or even the repeal of US financial sanctions.”

Even before Mr Trump’s election win, Russia’s fortunes had been looking healthier. Within the country there are hopes that a stagnant financial services industry will be fired up with an influx of new investment. UBS has made buying Russian debt one of its top trades for 2017 while Moscow’s stock index trades at a record high.

Mr Nangle said Russia’s state banks and commodities companies would be obvious investment targets. But, he adds, “a lot has to go right before big global corporations have to take Russian risk again”.

The rouble’s fall had pushed production costs in Russia down, while sanctions prompted deleveraging that sent corporate debt levels to a five-year low, making investment more attractive.

While the country has not returned to regularly issuing Eurobonds, investors are far more relaxed about the risk of investing in Russian bonds. In January, the annual cost of insuring $10m of Russian debt against default was $400,000, according to Markit. Now it is $227,000.

International investors say they have space to include more Russian assets in their portfolios after the extended lack of issuance.

In the popular JPMorgan index of dollar-denominated emerging market bonds, Russia’s weighting is just 4.3 per cent — down from 5.75 per cent of the index in 2012.

However, there is a fair chance that markets may be getting ahead of themselves in expecting a radical new phase of Russia-US relations.

“Does Russia want better relations?” asks Mr Szabo. “Concrete signs of detente are hard to pin down and Vladimir Putin has used the idea of opposing the US as an enemy to shore up his popularity in the past.”

Alexander Morozov, chief financial officer of Sberbank, Russia’s largest bank, is more cautiously optimistic. “There’s a Russian joke where an optimist and a pessimist meet,” he told the FT.

“The optimist says, ‘It can’t get any worse,’ and the pessimist agrees with him: ‘It can’t get any worse!’