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Investors warm to Russia as bond fund inflows surge

Investors have warmed to Russian assets, welcoming the country in from the cold.

Russian bond funds counted record inflows in the week to February 1 as higher crude prices and improving relations with the US prompted an investor rotation back into the country.

Emerging markets more broadly have found renewed investor appetite as the dollar has fallen to an 11-week low. More than $1bn flowed into EM fixed income and equity portfolios in the past week, EPFR data showed.

Investors added roughly $140m to Russian bond funds, lifting the asset class’s haul since the US election to nearly $700m, while equity funds stretched their streak of additions to 12 consecutive weeks, according to EPFR.

The inflows have propelled Russian equity markets higher, with the MSCI Russia index up 19 per cent since Donald Trump was elected president, and sent yields on the country’s debt lower. Russian dollar-denominated credit has returned more than 12 per cent over the past year, including a 1 per cent gain so far this year.

Investors have pinned their bullish sentiment on a higher oil price, which is expected to buoy economic growth and cut the Russian deficit, and a softer US policy stance.

On Thursday, a modification of sanctions by the US Treasury department prompted a brief rally in the rouble before investors fully dissected the change. The move, which the Trump administration said was not an easing of sanctions, was meant to benefit US companies.

Meanwhile, Russia is to spend more than Rbs113bn ($1.9bn) during the next month in an effort to weaken the rouble, marking a reversal from the 2014 foreign exchange shock that forced it to intervene heavily to stop the currency falling too far.

The central bank will spend Rbs6.3bn a day on forex transactions from February 7 to March 6, the finance ministry said in a statement on Friday. The move follows a steady rally in the rouble as the oil price has picked up.

Economists at Bank of America Merrill Lynch said there was a “strong chance” that the stand-off between Russia and the west would end in early 2018, as political support for sanctions wanes in Europe and the Trump administration sends signals that the curbs are subject to negotiation.

“US-Russia relations appear likely to improve,” said Win Thin, a strategist with Brown Brothers Harriman. “With inflation likely to continue falling and the central bank likely to cut rates several times this year, we think Russian bonds will start to outperform more.”

While overall allocations to EM assets remain below the post-crisis average, investors have “upped allocations” to Russia, according to Celso Nozema, an economist with the Institute of International Finance.

“We continue to maintain a positive bias on Russia, especially in a world of rangebound oil dynamics,” strategists at Citi said. “Fiscal prudence remains high, with Putin confirming that excess revenues from higher-than-forecast oil . . . would go towards decreasing the deficit rather than increasing spending.”

Additional reporting by Max Seddon in Moscow

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