Morningstar Insights: Russia towards bankruptcy

The Russian economy is a mess: The MOEX Russia Index, which tracks the equities of the 50 largest and most liquid Russian companies, plunged from the Feb. 24 start of the invasion until the country’s stock market closed Feb. 28. Simultaneously, Russian and Ukrainian bond yields spiked. Crude oil and commodity prices have rallied, and assets often used as safe havens, such as gold and high-quality developed-markets government bonds, have strengthened.

The rouble crashed to less than one U.S. cent as the Russian central bank hiked interest rates 1,050 basis points to 20% on Feb. 28; Russia has kept local securities markets closed at least until March 4. Local sovereign debt remains untradable and its prices uncertain. Russia reportedly has made interest payments on its bonds, but sanctions have kept investors from collecting. It’s not clear if the bonds are in default.

“Ukraine’s ability to make a roughly $300 million Eurobond coupon payment last week shows the country may still be able to meet its obligations, according to TCW’s emerging-markets debt team. The majority of fixed income portfolios were holding limited exposure to Russian and Ukrainian bonds and the direct impact of the geopolitical escalation on performance has been limited. That said, some managers within emerging-markets or nontraditional bond categories had significant exposure in the region and have underperformed peers and their benchmarks during the crisis.” – Evangelia Gkeka, Senior Manager Research Analyst, Morningstar

Morningstar analysts checked in with managers of Morningstar-rated bond strategies with some of the larger stakes in the countries to see how they’re coping:

Global bond indexes have negligible exposure to Russia and Ukraine, but global emerging-markets debt benchmarks such as the J.P. Morgan Global EMBI Diversified Index of emerging-markets sovereign and quasi-sovereign bonds denominated in U.S. dollars or “hard currency” and the J.P. Morgan GBI-EM Global Diversified Index, a popular local currency debt benchmark, had modest weights to Russia and Ukraine by the end of February 2022 due to depreciation. Previous plans to add Ukraine to the local benchmark at the end of March are on hold.

In recent years, many active emerging-markets bond managers have kept more money in Russia than the J.P. Morgan EMBI Global Core Index, due to the country’s tight fiscal policy, low public debt, strong central bank, and recent high commodity prices. Other managers, however, reduced exposure as they grew wary of rising tensions in Ukraine.

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