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. Last Updated: 07/27/2016

California Pension Fund Warms to Russian Debt

A decision by the largest public pension fund in the United States to buy Russian debt may pave the way for other conservative fund managers to invest in the country.

The California Public Employees' Retirement System, or CalPERS, last week decided to open up its investments into debt in emerging markets such as Russia, China, Egypt and Indonesia.

The decision comes after the three leading international rating agencies -- Moody's, Fitch and Standard & Poor's -- awarded Russia an investment-grade rating over the past year.

The third-largest retirement fund in the world, CalPERS manages pensions for about 1.4 million state employees in California. At the end of the first quarter, its assets stood at $180.4 billion, with some $6.6 billion invested in foreign bonds.

Large pension funds, the most conservative of investors, have generally shunned Russia for lack of stability. CalPERS's decision could now inspire others to enter the debt market.

Yet Natalya Orlova, chief economist at Alfa Bank, expressed skepticism that Western pension funds would fall over themselves in the quest for Russian debt.

For one, she said, the government has not indicated that it plans to issue any new bonds. Furthermore, the domestic debt market is even less attractive, given its low liquidity, she said.

On the other hand, Orlova said that Russian eurobonds were likely to be a good investment for pension funds.

"Typically, they are ready for lower returns," she said. "So the arrival of such funds could provide better spreads for Russian eurobonds against U.S. Treasury notes."

CalPERS said that it intended to widen the list of countries it dealt with.

"Our debt-investment-country list will be a living policy," Charles Valdes, head of CalPERS's investment committee, said in a statement. "Countries can be assured that we will continually update our list as rating agencies update ratings."