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. Last Updated: 07/27/2016

Russia Move Struck Blow to Investors

LONDON -- Russia's move to effectively devalue the ruble and suspend repayment on some overseas debt has dealt a blow to foreign investor sentiment, fund managers said Tuesday.

"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 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 ruble.

"The stable ruble 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."

Fund managers, however, 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 ruble devaluation will benefit Russian oil producers by increasing the ruble value of their strong overseas revenues, fund managers said.

Banks will be crippled by the moves and consumer sensitive shares may be hurt as Russians feel the pinch, managers said. Bertoni of Invesco points to Rostelecom as an example of a share that may be harmed. He said the firm has $500 million in U.S. dollar-denominated debt but it had little in the way of dollar earnings to offset its liability.

But Russia's macroeconomic policy is so cloudy that making any kind of medium-term prediction is 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. "People are selling because the risk on the downside is tremendous."