• Near-term volatility will continue to be driven by an escalation or reduction of tensions on the ground in Ukraine and the political chess match between the West and Russia.

• European dependency on Russian energy exports provides a clear economic cost to the EU, should it impose more aggressive sanctions.

• For long-term investors, Russian corporate bonds offer attractive levels on an absolute and a relative basis compared to corporate bonds from both U.S. issuers and from other emerging market (EM) countries.

• Market conditions merit a high degree of scrutiny. We remain biased toward bond sectors that are strategically important and can potentially benefit from a falling ruble, as well as issuers that have a proven track record and adequate access to capital.

Investors continue to monitor developments on the ground in Crimea and the Ukraine as well as the political chess match between Russia and the West. As a result, volatility has increased dramatically as investors react to headlines. For many, memories of losses from Russia’s default in 1998 have resurfaced along with the pervading distrust during the Cold War. For investors, the fear of the political unknowns is continuing to complicate investment decisions.

Last week, Russian assets sold off markedly ahead of the succession vote in Crimea. Now, with Russia’s annexation of Crimea countered by only an incremental response from the West, credit markets have recovered somewhat. Russian corporate bonds have rallied significantly from the lows both on an absolute basis and compared to corporate credits in other countries. But corporate bond spreads and credit default spreads remain significantly wider than they were at the beginning of March.

Yield Spread over Treasuries

As investors, we continually assess risks on the basis of the likelihood of various potential scenarios. We see three scenarios emerging from current tensions.

Uneasy Stability – Crimea is annexed, the West delivers a face-saving wrist slap, and tensions die down but don’t severely dent the economic interests of either side.