It’s a strange world when, to gauge the state of economic affairs in Russia, one has to look at government bond yields in Switzerland and many eurozone countries.
But that’s exactly what things have come to.
The eurozone mess is putting pressure on the Russian economy and, so far, it’s handling it well. If things don’t deteriorate further in Europe — and I have some difficulty being an optimist on that front — Russia is a bargain. If they do, it still is a bargain, just one with a much longer-term payoff.
Swiss two-year government bond yields have long stopped reflecting the economic situation in Switzerland, as they now serve as a gauge for anti-euro sentiment. Since April 24, they have spent the whole time sinking deeper and deeper into negative territory while the eurozone drama has been unfolding. They “yielded” -0.39% at last count. This is because the Swiss National Bank has drawn the line at 1.2 on the EURCHF exchange rate after pressure from the exodus of panicky euro holders drove the Swiss currency to near-parity with the euro last year.
The pressure from the EURCHF cross has now shifted onto Swiss government bonds, as they guarantee the holders payment in Swiss francs upon maturity, regardless of whether the euro is with us two years from now or not. Other relevant spreads of Spanish and Italian government bonds to German bunds — the least-risky eurozone sovereign debt instruments — are at or close to all-time highs.
The Swiss Mix
I’m sure you’re wondering how this is all this relevant to Russia. Well, Russia is the No. 1 global exporter of natural gas (at 200 billion cubic meters) and the No. 2 oil exporter (at 5 million bbl/day). The largest chunk of those exports goes to Europe, and the same is true for its imports.
With 2008 still fresh in the memory of many foreign investors, this time they appear to be selling first and asking questions later, despite efforts from the local authorities to maintain economic order. In 2008, the Russian economy saw $134 billion of net capital outflows, almost all of it — $130 billion — concentrated in the fourth quarter right after the Lehman failure and the expeditious global domino effect.
This time, no such panic is evident, but in 2011 foreign investors pulled $80.5 billion out of the country, and in the first six months of 2012 they pulled out $43.4 billion in an eerily orderly manner.
While some undoubtedly will pin part of the blame for this on the re-election of Mr. Putin, it appears that the stress in Europe actually has far greater impact in this case. As things quieted down (temporarily) in Europe, the MSCI Russia Index rebounded since its June lows and now trades at a forward P/E of 4.4, a dividend yield of 3.8% and a mere 0.8 times book value. For comparison, the MSCI Emerging Markets Index trades at a P/E of 11.3, dividend yield of 3.1% and 1.6 times book value.