• ACI Russia

08/18/1998 15:05:18 Russia devaluation to spook investors for years

By James Saft LONDON, Aug 18 (Reuters) - Russia's move to effectively devalue the rouble and suspend repayment on some overseas debt has dealt a severe and long lasting blow to foreign investor sentiment, fund managers said on Tuesday. Russia on Monday loosened the trading band of its currency and declared a 90-day moratorium on some non-federal debt repayments, prompting a 30 percent slide in the rouble in official fixings. "It will take one or two years rather than two or three months for investor confidence to return," said Ruaridh MacDonald, global bond portfolio manager at Dresdner RCM, who helps look after a $2 billion emerging market debt portfolio. The moves dealt twin blows to already shell-shocked foreign investors in Russian debt and equity as prices plunged. The IFC Investible Russia index has fallen some 72 percent year-to-date in U.S. dollar terms while JP Morgan's Russia Emerging Markets Bond Index has fallen 52 percent in the same period. Fund managers said the moves did not address Russia's structural problems but had introduced an unnerving vacuum into what had been the heart of investors' Russia equation: the rouble. "The stable rouble was the pillar of Russia's economic policy," said Francesco Bertoni, head of emerging markets at Invesco in London. "Until we see the currency finding its right levels investors will be very concerned about getting involved." However fund managers were at pains to point out that a devaluation would not be bad news for all shares. "Looking at classic devaluation plays, the oil sector is the obvious one to look to," said Douglas Helfer, who helps to manage Foreign & Colonial's $150 million Russian equity portfolio. "Valuations in that sector are extremely low now." A rouble devaluation will benefit Russian oil producers by increasing the rouble value of their strong overseas revenues, fund managers said. Helfer feels that Russian assets are "incredibly cheap," but he is staying neutral to Russia in emerging markets portfolios because of the volatility of the situation, he said. But Invesco's Bertoni said the devaluation may only offer a short-term benefit to Russia's oil companies. Russia's oil industry faces an enourmous modernisation challenge in coming years and the massive equity and debt needed will now come at a far higher price, he said. But far more sectors have been harmed by the fall in the rouble, fund managers said. Banks, already ailing, will be crippled by the moves and consumer sensitive shares may be hurt as Russians feel the pinch, fund managers said. Bertoni of Invesco points to Rostelecom <RKTM.RTS> as an example of a share that may be harmed. He said the company has $500 million in U.S. dollar-denominated debt but it had little in the way of dollar earnings to offset its liability. Rostelecom has fallen to $1.13 from $1.295 since Friday. Standard & Poor's on Monday cut Russia's long-term foreign currency rating to default-level, triple-'C', highlighting another set of risks for Russia, which owes some $160 billion to foreigners. MacDonald said that worried fund trustees might force sales of Russian debt due to the rating. But Russia's macroeconomic policy and political climate is so cloudy that making any kind of medium-term prediction is extremely difficult. "The market is in a make or break situation," said Bertoni, who said he has begun to fear for Russia's ability to persevere with market-based reforms. "Poeple are selling because the risk on the downside is tremendous," he said. ((James Saft, London newsroom +171 542 2734, ukinvestments.news@reuters.com))

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