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. Last Updated: 07/27/2016

Russia's Sovereign Debt Soaring to New Highs

NEW YORK -- Along with the rise in stocks and bonds on the Moscow financial markets, Russia's sovereign debt is also soaring to new highs.

Although hit slightly Wednesday and Thursday by profit-taking and false rumors that President Boris Yeltsin had died, Vneshekonombank paper is still trading around 79 cents to the dollar -- more than double levels of earlier this year.

"Russia will continue to be, if not the best, then one of the best-performing assets in the emerging debt market," said Peter Lannigan, portfolio manager of the Phoenix Emerging Market Bond Fund.

Phoenix led other funds in a Lipper Analytical Services emerging debt poll last month based on its strong presence in Russia, and Lannigan said he would maintain an 18 percent allocation in the country.

"The market will continue to do well and Russia will continue to do better," he said.

Russian bond prices are up 12 percent in October alone.

"Russian debt prices are tight relative to where they were, but relative to everything else in the market they still look cheap," said Steve Merrell, senior portfolio manager at American Express Financial Services.

Analysts said the country's recent positive credit ratings, improved inflation outlook, export earning potential and restructured bank debt provided stability to its macroeconomic picture.

Earlier this week Standard & Poor's assigned Russia a BB- long-term foreign debt rating, and Moody's Investors Service issued a Ba2 sovereign ceiling.

While Russia's economic fundamentals appear healthy, the financial markets expect uncertainty in the country's political scene because of Yeltsin's scheduled heart surgery and the accompanying infighting among potential successors.

"During this time the markets are likely to show some periods of high volatility," said Luis Luis, director of emerging market analysis at Scudder Stevens & Clark, a Boston-based mutual fund.

"One has to ride that out ... In terms of relative value it certainly has value."

One emerging markets debt expert explained that the stellar performance of Russian loans this week was actually a repricing of spreads to those of comparably rated U.S. high-yield bonds.

"If you look at where comparably rated high-yield bonds trade, Russia still looks extremely cheap, so you are seeing a big repricing of Russia up to those levels," the source said, noting that a similar trend is emerging in the broader market.