Determinants of Russia’s Sovereign Risk

This paper presents an empirical analysis of the determinants of Russia’s sovereign risk. The spreads on sovereign Russian credit default swaps (CDS) were used as a measure of risk. Based on the accuracy of out-of-sample forecasts, the factors that influence Russian CDS were selected: the implied volatility of the rouble exchange rate, the size of foreign exchange reserves relative to GDP, and the average spread on other emerging market CDS as a proxy for global factors. In turn, the CDS of emerging market countries are determined by the volatility of their currencies, the slope of the US government bond curve, and also by the increments of the dollar index.