Russia’s central bank has expertly steered its way through a series of headwinds due to its top-notch organisation, its immaculate timing and its willingness to take risks, according to Ashmore’s Jan Dehn (pictured). 
The head of research has awarded the Central Bank of Russia an ‘A+’ despite many investors steering clear of the high-risk market.
The country, which is a ‘BRIC’ nation alongside Brazil, China and India, endured a series of hard hits following the drastic fall in oil price, which impacted export revenues and caused the rouble to plummet.
What’s more, the geo-political crisis in Ukraine and the imposition of financial sector sanctions on Russia by the international community sparked unrest in the market, causing many nervous investors to pull their money out of the country.
Performance of indices over 1yr
Source: FE Analytics
However, Dehn believes that Russia’s central bank has proven its hardiness and skill throughout this testing time.
“Russia’s central bank has handled a triple-whammy of shocks without putting a foot wrong,” he said.
“In assessing the central bank’s performance, marks should first be awarded simply for being well-prepared. Russia clearly learnt the lessons of 2008/2009 after which it had adopted a fully flexible exchange rate and converted the OFZ [Russian government bond] market to Euroclearable settlement.”
Russian debt became Euroclearable in 2013, which meant that foreign investors buying into Russian rouble bonds could process them through Euroclear, a clearing house which verifies information between two brokers in a securities transaction.
The move led to Russian bonds becoming more accessible and safer as they became protected under Belgian law.
What’s more, the fact that Russia entered the recent crisis with a very strong foreign-exchange reserve position also contributed to the Russian central bank’s efficiency, according to Dehn.
“The next set of marks should be awarded for maintaining focus and discipline,” he continued.
“In the face of strong political pressure the central bank allowed the currency to adjust in line with oil prices. This insulated the public finances from the oil price shock.”
“The central bank also earns a bonus point for not introducing capital controls and racks up significant additional credit by decisively hiking interest rates to 17 per cent on the (correct) view that an external shock, such as falling oil prices, requires a decisive adjustment of domestic demand.”
Opinion is often divided on whether capital controls are a good idea – while most of the largest economies have a liberal capital control policy, some people believe that they provide a safety net to less stable economies.
However, others believe that capital controls limit the efficiency of a market and its ability to progress, as they think opening an economy to foreign capital can raise demand for domestic stocks.
The rate hike, which occurred at the end of last year in a bid to prevent the collapse of the rouble, boosted interest rates to levels not seen since the country’s default in 1998. This worked, as the rouble has been one of the best-performing currencies this year.
However, just over a week ago, the Russian central bank cut rates ahead of market expectations, following the economy’s entrapment between plummeting growth and high inflation.
“[This was] a decision that subsequent events proved to be immaculate timing,” Dehn explained.
“This decision showed leadership and a willingness to take risks. The central bank showed the same qualities when it then decisively helped to bring Russia’s extremely mispriced sovereign spreads down to more rational levels.”
To do this, the Central Bank of Russia launched a foreign-exchange repurchase agreement that allowed locals to buy sovereign bonds. As both the rouble and spreads approached levels that Dehn describes as “more rational”, this agreement was tightened.
“[The Central Bank of Russia] also understood the temporary nature of such interventions,” he added. “Based on professional competence, Russian central bank governor, Elvira Nabiullina, is a contender for central banker of the year.”
Before the Russian central bank cut rates last month, Nabiullina ruled out the use of quantitative easing while the likes of eurozone and Japan were launching their programmes to a positive reception.
The governor of the central bank said that she would continue to rely on interest rates and that the Russian banking sector was stable, despite scepticism from various analysts who believed its banks were vulnerable.
It’s this strong-willed, contrarian approach that has led to more and more fund managers and financial experts warming to the emerging market country.
In an article earlier this year, FE Trustnet explored whether investing in Russia, while it was at the brink of a potential recession, was a good idea or simply a ludicrous suggestion.
Colin Croft, manager of the Jupiter Emerging European Opportunities fund, said that 2015 was a good time to buy into quality businesses in the country, so long as the investor adopted a long-term view.
“A decade ago, companies in the region were generally reluctant to pay dividends,” he said.
“In some cases, this was for good reasons: many needed to reinvest profits in businesses that were doubling in size every two years.”
“In other cases, it was for less enlightened reasons that reflected serious corporate governance issues.”
However, the manager said that this has changed significantly over the last decade, adding: “Many of the businesses that were then in the early stages of breakneck growth have now, in my view, matured to a stage where they can increasingly fund their expansion plans from cash flows, while paying progressively higher dividends.”
What’s more, Russia isn’t the only BRIC country to be winning over investors. With the Chinese stock market continuing to rally and the election of pro-business reformist Narendra Modi as Indian prime minister last year, what was once a nerve-wracking market for many is becoming more appealing.
In fact, since the start of this year, the MSCI Emerging Markets index outperformed the MSCI World index by 5.03 percentage points with a total return of 11.81 per cent.
Performance of indices since 2015
Source: FE Analytics
Even Brazil, another major oil exporter, is becoming popular among investors, with Franklin Templeton’s Mark Mobius telling FE Trustnet he remains optimistic despite the market’s various headwinds.
“I’m pleased to say that while Brazil certainly still has problems to work through, I’m a little more optimistic about the investment prospects there than I was six months or so ago – and that’s partly because everyone else seems so pessimistic,” he said.