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By Bloomberg

The gloom in Russia’s junk-rated corporate- bond market is starting to lift.

A month ago, as Standard & Poor’s moved closer to downgrading Russia, $44 billion of the nation’s corporate Eurobonds traded at distressed levels, reflecting mounting concern their issuers were at risk of default. That amount has dropped by more than 50 percent to $21 billion as of Feb. 17, even after S&P cut the country to junk, amid a rebound in oil and after central-bank measures to ameliorate credit conditions.

While Russia may slip into a recession this year for the first time since 2009, the number of bonds trading at least 1,000 basis points above U.S. Treasuries has fallen to 42 from 68 last month, according to data compiled by Bloomberg. Central- bank Governor Elvira Nabiullina helped spur the rebound after she unexpectedly cut interest rates last month following December legislation enabling the deposit-insurance agency to buy stakes in banks moving toward bankruptcy.

“Some investors had fears of a wide-scale financial crisis in Russia -- a credit crunch -- which did not take place,” Dmitry Dudkin, the head of fixed-income research at Uralsib Capital in Moscow, said by e-mail on Feb. 16. “There’s nothing seriously positive in the Russian economic outlook, but it no longer looks like it’s falling apart.”

The demand for Russian assets has surged as the price of Brent crude rebounded 32 percent from a six-year low on Jan. 13. Sanctions over Russia’s role in the Ukraine conflict has shut companies out of Western capital markets, raising concern they will be unable to refinance foreign-currency debt.

Policy U-Turn

The nation’s equities and the ruble have rallied the most in the world this month. Corporate bonds returned 6.2 percent in the past one month, the best performance among emerging markets except Venezuela. Sovereign-bond yields have fallen to the lowest level since Dec. 11.

Nabiullina cut the benchmark interest rate by 2 percentage points to 15 percent on Jan. 30, six weeks after increasing it to an 11-year high. The U-turn signaled that policy makers are now focused more on arresting the economic slump than on protecting the ruble. The Bank of Russia will reduce borrowing costs further by the end of April, 70 percent of 33 economists surveyed by Bloomberg said.

The deposit-insurance agency on Feb. 5 named 27 lenders including OAO VTB Bank and OAO Gazprombank as being eligible for recapitalization through local bonds.

Fulfilling Obligations

The yield on state-owned VTB’s $2 billion of April 2017 dollar notes have declined 409 basis points in the past month, taking it out of distressed territory. The bank’s press office said VTB intends to repay all its bonds on time. OAO Rosneft, Russia’s largest and most indebted oil producer, repaid a $7.2 billion loan on Feb. 12, clearing more than half of the debt it has due this year.

“The risks associated with Russia have decreased,” Alexey Demkin, head of research at Gazprombank in Moscow, said by e- mail on Feb. 16. “Geopolitical risk has subsided and Russian borrowers have continued to fulfill their debt obligations without any problems.”

While risks of default have eased, many Russian companies still face difficulties, according to Peter Varga, who manages $1 billion in emerging-market corporate bonds at Erste Sparinvest in Vienna. Alliance Oil proposed on Feb. 16 to pay bondholders a one-time premium for extending the maturity of its dollar bond due next month.

“Cyclical companies with high debt denominated in foreign currency and sales only in rubles are at risk of default,” Varga said by e-mail on Feb. 16.

Investors are also watching whether a cease-fire in eastern Ukraine holds. The truce, agreed between Russia and European leaders, is already under threat as fighting continues. Also, bondholder sentiment will depend on the oil price, Uralsib’s Dudkin said. Brent crude fell 1.6 percent to $61.51 a barrel at 18:36 a.m. London time on Wednesday.

“Provided it is more or less where it is now, there shouldn’t be 40 distressed bonds,” Dudkin said. “If the oil price falls to, say, $30 a barrel, it will be a different story.”