* Emerging market currencies graphic tmsnrt.rs/2e7eoml
* Emerging market real exchange rates tmsnrt.rs/2fHdpx5
(Updates with Oreshkin rouble comment)
By Sujata Rao and Alexander Winning
MOSCOW, April 7 Political turmoil in South
Africa and Turkey is luring money managers away and into Russian
securities, complicating Moscow authorities' battle to tamp down
the rising rouble.
By February, foreigners' share of the rouble bond market had
already risen back to early-2013 highs of 28 percent, according
to central bank data. But momentum has escalated since:
JPMorgan's monthly client survey found the increase in rouble
debt positions in March to be the largest on record.
Falling inflation, 8 percent yields and a central bank keen
to keep interest rates relatively high are the main draw. But
since March 27, the Russia trade has received fresh impetus to
go along with that which it has already been getting from
South Africa, another big emerging market, has plunged into
political chaos, leaving it on the brink of joining Russia as a
junk-rated credit but with the added drawback of a large balance
of payments deficit.
S&P has already cut South Africa from investment grade and
Moody's is considering it.
"Russia doesn't have the political instability that's
afflicting Turkey and South Africa, or their weak fundamentals.
It's helping Russia that other mainstream high-yielders are
having their own problems," said Salman Ahmed, chief global
strategist at Lombard Odier.
JPMorgan said it had cut allocations to South African debt
and currency, adding: "Political risks remain in Turkey as well,
so we choose to express (preference for high-yield bonds) solely
via an overweight Russia in our (global bond index emerging
markets) model portfolio."
Russia's central bank, meanwhile, has won praise for dogged
inflation targeting. Slowing price growth has left real -- or
inflation-adjusted -- bond yields at almost 400 basis points, a
magnet for foreign investors in search of yield.
Finance Minister Anton Siluanov this week said Russia had
received overseas inflows during the first quarter, despite
capital flight of around $5 billion in January-February.
That inflow may accelerate, if Russia picks up even a small
part of the $10 billion or so that could flee South Africa
should its ratings all fall into junk.
Investors canvassed by Citi remain unperturbed by the fact
the Russia OFZ federal bonds trade is crowded.
With OFZ returns of around 13 percent already this year in
dollars, that confidence appears justified. But some
policymakers and businessmen are becoming uneasy about rouble
Inflows helped boost the rouble 8 percent this year -
outgunning most emerging currencies despite oil's 4 percent
Coming on top of a 20 percent appreciation in 2016, that has
left the rouble overvalued by up to 12 percent, Siluanov
Andrey Guryev, the chief executive of fertiliser company
Phosagro said the rouble's fair value was 63-65 per
dollar and grumbled about the 9.75 percent interest rate.
"What we see clearly is that the Russian rouble is
overpriced," Guryev told Reuters. "If I want to borrow in
roubles it will be from 9-11 percent, which is ridiculous ...
this is a really big problem, also for Russian GDP growth."
In fact, the rouble's real effective exchange rate --
against trade partners' currencies and adjusted for inflation --
is only slightly above its 10-year average.
Meanwhile, Russian households and companies, lured by high
deposit rates and a firm rouble, are joining in the bond rally.
Hard currency-denominated bank deposits comprised 23 percent of
the total as of March 1, from 29 percent a year ago, central
bank data shows. Russian lenders' rouble debt holdings rose to
65 percent up from 57 percent last March.
So might Moscow short-circuit the OFZ trade by engineering a
rouble fall? It could do so through central bank interventions
on top of the finance ministry's daily dollar purchases that
were launched in February, or by speeding up rate cuts.
In a fresh attempt to talk down the currency, Economy
Minister Maxim Oreshkin said this week there was a good chance
the rouble would fall sharply by year-end to 68 per dollar.
The government clearly favours a weaker rouble to boost
budget revenues from energy exports.
But a sharply weaker currency would jeopardise the 4 percent
inflation target. Central bank chief Elvira Nabiullina has said
the rouble has not sharply deviated from justified levels and
that she was not worried by the carry trade flows.
Chris Weafer, senior partner at Moscow's Macro-Advisory
consultancy, called the dilemma "a delicate balancing act",
predicting the currency will fall to 62 per dollar by year-end,
with the possibility of bigger, 50 bps rate cuts.
But investors are not really banking on the rouble in this
trade, says Lombard Odier's Ahmed.
Only a fifth of this year's total OFZ returns will come from
rouble appreciation he reckons, versus half in 2016. The rest is
down to falling bond yields -- 10-year yields fell this week to
three-year lows of 7.86 percent, already down 64 bps from
(Additional reporting by Karin Strohecker; Editing by Jon