Russian Directs Pension Fund Money to Corporate Bonds in Bid to Counteract Sanctions

In the midst of Western sanctions, Russia is looking to stimulate its economy from within: the country is forcefully urging its pension funds to invest in bonds of domestic corporations.

Pension funds, however, are understandably reluctant; Russia’s sturdiest companies aren’t issuing bonds, which means many pension funds are scooping up bonds that are considered “junk”, and below the minimum standard set by the funds’ investment policy.

More from Bloomberg:

President Vladimir Putin’s government is pushing pension funds to buy more corporate bonds whether they like it or not. And many don’t.

In an effort to replace the foreign investment sapped by sanctions, Russia is guiding pension assets into companies’ bonds by halving the amount the funds can hold in banks. The reason managers say they’re stashing money in deposits is corporate bonds are just too risky for their retirement savers.

“We’re sure the state would save banks in case of emergency but we understand that it won’t be able to protect us from facing corporate defaults if the economic situation worsens,” Natalya Chuykova, who helps manage the equivalent of $1.3 billion of pension assets as a vice president at OAO Elektroenergetiki in Moscow, said by phone on Friday.

The reluctance from pension managers underscores wider caution about investing even in Russian companies untouched by U.S.-led sanctions as lower crude prices send the oil-export dependent economy into recession. Corporate yields soared as much as 9 percentage points amid the ruble’s collapse last year through January, before dropping by an average 5 percentage points this year, according to a bond index compiled by Uralsib Financial Corp. in Moscow.

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One problem with the corporate-bond market, say pension-fund managers, is that the best quality companies aren’t issuing. Most of the 323 billion rubles of bonds sold in May and June were from companies with junk credit ratings below the minimum required level for pension funds of BB-. About half of the bonds were issued by banks, according to Denis Poryvay, an analyst at AO Raiffeisenbank in Moscow.

Russia is changing a key part of pension funds’ investment policy; last year, funds were permitted to put up to 80 percent of their money in banks – and many funds did put their money there because they were uncomfortable with other domestic investments.

But starting in 2016, that 80 percent limit will drop to 40 percent. The change will force pension funds to get active with their money – with likely destinations being corporate bonds.