Investments in Venezuela come with plenty of political risk, but that risk may already be priced in, making it a better deal than countries where risk is growing but not yet reflected in bond yields. Societe Generale analyst Régis Chatellier thinks it’s a good time to shift investments from the Ukraine to Venezuela to take advantage of a spread that looks like it will narrow.

Venezuela and Ukraine ratings

“We recommend buying the Venezuela $2026 and selling the Ukraine $2023 on a cash neutral basis. We expect the spread between the two bonds to narrow by 150bp in the next three months,” writes Chatellier. With former Venezuelan President and strongman Hugo Chavez recently deceased, there is still a chance of significant political turmoil, but this is a low-probability, high-impact risk.

Ukraine is experiencing rising tension with Russia over everything from the ongoing fight with Belarus over potash production, which necessarily draws in the region’s biggest power, the potential shale agreement with Chevron Corporation (NYSE:CVX), and a Ukraine-EU trade agreement set to be signed next month. The economic impacts of this tension may be small compared to a coup or sudden currency devaluation in Venezuela, but they are also much more likely.

Venezuela and Ukraine CDS ratings

“The CDS market has been pricing a higher risk for Ukraine than for Venezuela (the premium to pay to be protected against default is substantially higher for the former than the latter),” writes Chatellier. “This is in sharp contrast with the bond market, where Venezuelan spreads have been trading much wider than that of Ukraine – except for the very short tenors… we expect bonds valuations to catch up with the CDS to better reflect the respective credit risks.”

ukraine venezuela cds bonds

Venezuela and Ukraine market performance

Of course, neither country is expected to outperform global markets in the next year, Chatellier expects both to have near zero growth, but that isn’t the point. Ukraine has an enormous external deficit, while Venezuela has a large account surplus. Venezuela also has a more manageable debt situation than Ukraine. The possibility that Russia could cut off the gas supply to Ukraine, even temporarily, is a large risk that investors need to account for, while Venezuela of course has its own supply of oil.

venezuela ukraine yield differentials

venezuela ukraine bond curves