Will Russia’s sovereign credit spread keep falling?

Russia’s bond market continued to fare well in March. This may have reflected a growing sense that the risk of a financial crisis in the country has passed in the wake of emergency rate hikes late last year and an end to the slump in the price of oil. Nonetheless, we doubt the strong performance will continue. After all, while Russia may avoid a financial crisis, the outlook for her economy remains bleak. (See our Emerging Europe service.) And the average “stripped” spread over US Treasuries of the dollar-denominated bonds included in EMBI Global index for Russia has already dropped to a level that, on the face of it, appears to be consistent with a price of around $80pb for Brent crude. We are not convinced this price, which actually fell last month, will climb that high any time soon – our end-2015 forecast is only $60pb. (See our Energy service.)