Brazil More ‘Fashionable’ for Investors Than Russia

Brazil is currently “fashionable” for investors while Russia isn’t, limiting the Finance Ministry’s ability to borrow abroad, said Bella Zlatkis, a deputy chief executive officer of OAO Sberbank.

While investor sentiment “lowers volatility on our market,” it should also be taken into account for budget planning, Zlatkis told a conference in Moscow today. The fiscal deficit is the main “sore spot” of the country’s macroeconomic outlook, Sergei Vasilyev, a deputy chairman of VEB, Russia’s state development bank, said at the same event.

“Borrowing will grow and sovereign debt will grow,” Vasilyev said. As sovereign debt increases, so will investors’ skepticism, he said.

The ruble has lost about 0.4 percent since June 30, making it the second-worst performer among the 25 emerging market currencies tracked by Bloomberg. Net purchases of Russian debt dropped by 7 percent since the end of August compared with 0.2 percent in Brazil, amid a record $47 billion of inflows into developing nations this year, data compiled by Boston-based research firm EPFR Global show.

The extra yield investors demand to hold Russian government bonds rather than U.S. Treasuries fell 4 basis points today to 210, according to JPMorgan EMBI+ indexes. The difference compares with 180 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

Budget Deficit

Russia’s budget is expected to remain in deficit through 2014, forcing the government to step up borrowing. The government in April sold its first foreign-currency bond since defaulting on $40 billion of domestic debt in August 1998, with an offer of $5.5 billion of five-year and 10-year dollar notes.

Russia also plans its first overseas sale of ruble debt this year. The government may borrow as much as $7 billion annually in 2011 and 2012 on international markets, according to a draft budget published on the Finance Ministry’s website.

Even so, Russia’s level of indebtedness remains among the lowest among major economies. State debt may reach about 11 percent of gross domestic product by year-end from 10.5 percent at present, Finance Minister Alexei Kudrin said on Oct. 5.

Brazilian Finance Minister Guido Mantega said Nov. 15 that President-elect Dilma Rousseff, who takes office Jan. 1, will seek to reduce net debt to about 30 percent of gross domestic product from 41 percent now.

Investments into Russia-focused funds reached $157 million in the seven days through Nov. 10, surpassing Brazil, India and Turkey for a third straight week, Uralsib Financial Corp. said on Nov. 12, citing EPFR data.