International investors outside of Russia are increasingly playing a significant role in supporting the hard currency debt of local sovereigns and corporates in the Commonwealth of Independent States (CIS), signifying a positive development for a region that has faced limited access to primary markets in recent years. As the reallocation of assets from Russia to the rest of the CIS gained momentum following the Ukraine invasion in 2022, this shift has become more pronounced. While relatively high oil prices have provided some support to commodity-exporting countries in the region, the inflow of capital is now also playing a crucial role, particularly due to the scarcity of new issuances from the CIS since the onset of the war, with Uzbekistan being the only exception.

"The last two years have seen major growth and wealth creation in the CIS [and surrounding] region as people and capital have flowed from Russia into countries like Armenia, Georgia, and Kazakhstan," noted Igor Nartov, a CIS specialist at KNG Securities, a fixed-income-focused investment bank. "As a result, the financial services industries in those countries have grown and matured extremely quickly to help invest that capital," he added. "There are now a lot more institutions and brokerages serving wealthy individuals in those countries." Similar trends are also emerging in Tajikistan and Kyrgyzstan, with high-net-worth individuals and retail investors relocating themselves, their businesses, and their capital from Russia.

Initially, this capital found its way into more traditional fixed-income products such as US Treasuries, which became increasingly attractive as yields rose over the past two years. However, with the consensus that rates have peaked and expectations of central bank cuts in the second half of the year, greater attention is now being paid to higher-yielding regional assets. "As US Treasury yields have started to come down from their peak, more of those investors have looked to use their knowledge of local markets and invest in Armenian, Georgian, Kazakh, and other CIS bonds, primarily sovereign but also some corporate," explained Nartov.

While the overall size of capital flows remains relatively small, it is challenging to discern their material impact on spreads and yields. Nonetheless, the bid yield on Armenia's $750 million 3.60% February 2031 bonds is currently close to its lowest point in the past two years, at around 7.09%, according to LSEG data. Similarly, the bid yield on Kazakhstan's €650 million 1.50% September 2034 bonds is holding near a two-year low at 3.71%.

Nartov anticipates that while the primary focus is on hard currency bonds, there will be increasing interest in local currency bonds as the markets in these countries continue to develop. He also highlighted the growing appetite for CIS corporates alongside the interest in sovereign debt. Greater participation from local investors can significantly influence how international accounts approach these credits, potentially reducing volatility. Local investors, driven less by changes in macro sentiment, are theoretically less likely to unload regional debt positions in response to market fluctuations compared to international investors.

One challenge lies in the fact that the pool of available assets is unlikely to expand in line with the growing demand. New issuances from the CIS have dramatically declined in the past two years due to the Russia-Ukraine war and higher interest rates. Since the invasion, there has been only one CIS sovereign Eurobond issue, which took place in October 2023 when Uzbekistan sold US dollar and som bonds. Odilbek Isakov, CEO and co-founder of Infrasia Capital and managing director and co-founder of Finasia Capital, highlighted the shift in the market landscape, stating, "Historically, the main issuers were Russian and Ukrainian entities. Now, with the two largest [CIS] countries out of the global markets, it is Kazakhstan, Uzbekistan, Azerbaijan, Georgia, and Armenia [left] to fill the gap."

The flow of capital from Russia into the wider CIS region has also alleviated pressure on many sovereigns to tap into the bond market. "Not only did [the war] shut the market for large Russian companies, but also large amounts of Russian cash and human resources moved to these CIS countries," emphasized Isakov. "This cash meant that smaller countries like Georgia and Armenia had double-digit current account surpluses." Higher interest rates and the availability of cheaper funding sources such as local markets, sovereign wealth fund assets, and development finance have further deterred CIS issuers from entering the market. However, Isakov expects a substantial level of issuance from both the sovereign and corporate sectors this year, particularly from Uzbekistan. The evolving dynamics of non-Russia-based investors and the growing local buyer base are reshaping the investment landscape in the CIS region. As capital markets in these countries continue to mature, the emergence of these investors brings forth new opportunities and potential stability for the region's economies