Sovereign bonds: Give us an E, give us an S… but maybe hold the G

News and opinion on finance

If their own research is to be believed, the world’s largest asset managers are fully seized of the importance of taking environmental, social and governance (ESG) risks into consideration when investing in sovereign Eurobonds.

Yet time and again, when it comes to the crunch, those same fund managers happily load up with long-term debt from regimes with weak governance and high political risk.

Take two recent bond sales from central and eastern Europe. On June 17, Belarus’s government raised $1.25 billion of funding – most of it with a maturity of more than 10 years – from international investors.

Two days later, the arrest of a leading opposition candidate for August’s presidential elections sparked a wave of protests, which were repressed with characteristic severity. Prices of the newly minted bonds duly plummeted.

Why were global funds happy to invest in the bonds of two notorious post-Soviet basket cases? The answer is the same today as it has been for decades, if not centuries 

Buyers of Ukraine’s 12-year bond were luckier. On July 2, policymakers agreed to cancel the deal, which had already priced, after the resignation of respected central bank governor Yakiv Smoliy threw local markets into disarray.

The fact that the issue was cancelled, however, should not be allowed to obscure the fact that global funds had been prepared to invest $2 billion in the sovereign bonds of a country that was demonstrably only a couple of steps away from disaster.

Ukraine’s central bank had been loudly denouncing attacks on its independence by vested interests for more than a year. In March, president Volodymyr Zelensky had sacrificed most of his remaining reform credentials by replacing the technocrats in his cabinets with political placeholders.

An agreement with the IMF at the end of May, which paved the way for the Eurobond sale, was built on the shakiest of foundations – namely, a banking law that could still be struck down by Ukraine’s constitutional court.

In other words, while the timing of Smoliy’s departure may have come as a surprise, the fact of it should not have.


Similarly, investors in Belarus’s bond cannot with any justification claim to be shocked by last month’s events. While the country’s finances may have improved marginally during the past five years, its politics have been static for much longer.

Dubbed Europe’s last dictator, president Aleksandr Lukashenko has not even pretended to temper his authoritarian tendencies during his 26 years in power. Dissent has been systematically quashed, with authorities particularly alert for possible disturbances in the run-up to presidential elections.

So why were global funds happy to invest in the bonds of two notorious post-Soviet basket cases?

The answer, of course, is the same today as it has been for decades, if not centuries. When low interest rates in developed markets are combined with an expansion of liquidity, high-yielding assets become extremely attractive to managers of capital.

Inevitably, many of these assets will be in capital-hungry emerging markets – and the bigger the yield differential, the less managers of capital will care about the risks associated with them.

Plus ça change, plus c’est la même chose. But maybe it’s time to bin some of those ESG sovereign risk reports.