Trump's victory in the elections in the US and rising oil prices boosted optimism of foreign investors, they are reviewing the risks of investing in Russia. The cost of a 10-year credit default swaps (investment risk indicators) in the end of December fell to its lowest in the last two years.
The cost of credit default swaps (CDS) fell to two-year lows amid rising oil prices and expectations investors that the policy of the United States President-elect Donald Trump will improve relations between the US and Russia. On Tuesday, December 27 ten-year CDS traded at 233 basis points since early December their value fell by 54 percentage points.
Five-year CDS in early December decreased by 46.5 points, to 178 basis points.
CDS price indicates the assessment of the risk of default by investors of a country. Last time the value of these securities dropped to the current values in July 2014. For example, July 16, 2014 the ten-year swap traded below 226 basis points However, while a barrel of Brent crude oil was worth more than USD 100 and the dollar on the Moscow Stock Exchange traded at 34-35 RUR. On Tuesday, December 27 oil traded above USD 55 a barrel and the dollar was worth 60.83 RUR.
"Reducing the risk of default is due to positive expectations of investors", - Bogdan Zvarich, Finam, says. He recalled that the Russian stock market in 2016 showed one of the best results among the emerging markets. From the beginning, the MICEX index rose by 23% (on Tuesday, December 27, it'sat the level of 2179.89 points), and RUR has appreciated more than other currencies. In January, the dollar reached 78-79 RUR. And at certain moments the US currency was worth above 81 RUR. "If the price of oil will continue to grow, the ruble may continue to be strengthened, and this will improve the situation with the budget. This factor has been taken into account by foreign investors", - the analyst said.
According to Citibank, foreign investors have invested more than USD 720 million in the shares of Russian companies since the beginning of the year. Particularly active investors invested just in the past few weeks. According to Citibank, the end of November inflow of funds into funds investing in emerging markets amounted to USD 829 million. The inflow was mainly due to Russia, where the market has increased by 19% in UDS for the past three weeks, the bank reported.
Foreigners invested in the debt market actively. According to the Bank of Russia, as of 1 November 2016, the share of federal loan bonds (OFZ bonds) owned by foreign investors was 26.8 against 21.5% at the beginning of the year.
According to experts, the mood of investors affected Trump's victory in the US elections. "Based on the rhetoric of future head of the White House, investors are counting on warming of relations between Russia and the US and the possible easing of any sanctions", - Ivan Manaenko, Veles Capital, says . According to Vladimir Miklashevsky, Economist at Danske Bank, the market has become much less sensitive to geopolitical risks than in 2014. "There are even investors who expect the abolition of anti-Russian sanctions by Trump's administration", - he says.
In addition, 2016 is ending with a much smaller budget deficit than previously, despite the oil price. "Prospects for the deficit reduction in 2017-2019 years are due to revenue and expenditure are feasible", the expert believes.
"Reducing the cost of investment risk in Russian assets could spur a new inflow of foreign capital into the country that can provide substantial support to the economy", Bogdan Zvarich, Finam, says.