During the global financial crisis, just about the only
place Russian companies could raise money was in the Kremlin.
With liquidity frozen and commodities prices down in the dumps,
the government used a large chunk of its massive reserves to
prop up Russias overleveraged businesses. Even so, 122 of
the local markets roughly 425 issuers defaulted.
A year on, companies across Russia and the former Soviet
Union have been enjoying historically low interest rates and,
through April, experienced little difficulty raising money from
a variety of sources.
Since the start of the year, the whole of the CIS
(Commonwealth of Independent States), of which Russia is the
largest member, looked set to benefit from increased access to
international debt markets. Commerzbank, for example, forecast
between $20 billion to $30 billion in new Eurobond issuance for
the entire CIS region in 2010, including sovereign, bank and
corporate bonds, of which Russia would account for $1525
But the picture changed dramatically last month, as market
volatility surged on fears over Greeces debt woes
hammering home the point that the regions fundraising
capacity is not immune to fallout from eurozone turbulence,
especially if it worsens sharply.
Market turmoil has already hit Russia specifically
its much anticipated April 22 dual-tranche, $5.5 billion
sovereign bond issue. The sovereign returned to the market
after a decade without selling a bond to issue liquid five- and
The transaction was broadly welcomed immediately after
pricing when it appeared to have met the sovereigns goal
of resetting its curve and by extension, that of
quasi-sovereign and corporate borrowers by establishing
a liquid benchmark.
But both tranches sank on secondary markets in the days
after pricing, leading bankers to question what went wrong with
the deal. Global markets turned sour as the deal was pricing,
with heavy selling of Greek debt infecting other sovereign
We thought that the existing spread was not
fully reflective of Russias fundamental strengths,
Russias deputy finance minister Dmitry Pankin told
Emerging Markets sister newspaper
EuroWeek. We wanted to see what the demand was
from the market, what kind of issue the bond market would like
Russia had hoped for even tighter pricing than that which it
achieved in the $5.5 billion issue, he said. The market
was not so good at the time when we priced the bond. Our
previous expectation was that we could get a better
The five-year tranche was priced at 125bp over US Treasuries
and the 10-year at 135bp over pricing calculated to be
as much as 35bp through the sovereigns existing
Many analysts believe the real purpose of the sovereign
issue was to reduce borrowing costs for Russian companies and
improve access to capital markets, rather than fill a hole in
the state budget.
These issues were purely a marketing exercise, as this
years deficit will be negligible, says Boris
Ginzburg, head of fixed income at the investment bank UralSib.
The Russian government used them as a way to meet
investors and draw attention to Russias
But in light of poor secondary performance, some emerging
markets bankers speculate the strategy might not bring down
borrowing costs for other issuers.
Pankin noted that the Greek fiscal crisis and its fallout
across Europe could have significant knock on effects in Russia
and beyond. Its a serious question for us in terms
of macroeconomic stability, Pankin said. Its
very difficult to make any projections, to make budget
projections, if we have such an unstable market with huge
volatility in the exchange rate and in the bond
Nevertheless, bankers are mostly downplaying the likely
near-term impact of eurozone tremors on the region. The
CIS is driven by different factors than Europe, says
Andrei Arofikin, managing director for investment banking at
Bank of America Merrill Lynch Russia, although he notes that
Russia is part of the global market, and thus is not
immune to global challenges.
Until recently, bond business was booming both
volumes and terms of the debt. Starting last June, Russian
companies began returning to the debt market in droves, after
the central bank expanded the list of securities accepted as
collateral for loans to include ones rated as low as B-. Since
then, the rouble debt market has thrived, with more
rouble-denominated debt issued in the last six months of 2009
(R659 billion) than during the whole of pre-crisis 2007 (R470
Marina Vlasenko, Commerzbanks lead emerging markets
credit analyst in London, claims that bonds are the favourite
instruments of CIS companies and banks for raising money.
Equity valuations and demand have improved significantly
after the crisis, but they havent approached pre-crisis
levels yet, she says. At the same time, the cost of
debt is really affordable.
First-tier companies are enjoying extremely low rates on
domestic markets. An April three-year issue by MMK for R8
billion was priced at 7.65%, while Aeroflot placed two
three-year issues for a total of R12 billion at 7.75%.
Second-tier companies are also joining the party, placing
bonds at rates just under 10%. By now, many companies have
already refinanced their existing debt and are considering
issues to expand operations. Second-tier companies are in
the first stages of accessing the market, says Ginzburg.
Lots of issues have been registered, but companies are
not rushing to place them due to continued concerns about the
Russian blue chips are seeking foreign debt in the Eurobond
markets, raising $13.7 billion last year. According to bankers,
businesses are expected to issue between $10 billion and $13
billion this year, with some $6 billion already sold. In doing
so, they hope to take advantage of current rates of
Even at low rates of interest, the popularity of Russian
issues remains high. In late March Russian Railways issued a
$1.5 billion, seven-year Eurobond at 5.739% 245bp over
swaps that was 10 times oversubscribed.
According to Vlasenko, borrowers are still largely focused
on deleveraging, with only a few sectors such as telecoms and
oil and gas spending on investment programmes. CIS
corporates are concerned with two main problems: refinancing
short-term debt and reducing funding costs, she says.
Analysts say the corporate sector has learned a lesson from
the crisis and now tries to match the currency of their
revenues and debt. This helps explain why local bond markets
are doing brisk business, while exporters prefer Eurobonds.
Theres a more conservative approach to debt than
before the crisis, says Bank of America Merrills
Arofikin. The leveraged finance that we used to see on
all levels is a thing of the past.
Banks are also borrowing again, albeit at slightly higher
rates. In March, Bank VTB, Russias second-largest bank,
issued $1.25 billion in five-year Eurobonds paying 6.465%. It
plans to raise another $1.25 billion abroad before the end of
the year, equal to half of its $5 billion in new debt planned
VTB chief financial officer Herbert Moos says the bank plans
to borrow the money through more exotic products, exploring
options ranging from sovereign wealth fund deals to syndicated
loans or even Islamic Sukuk.
State controlled Sberbank, Russias largest bank, is
considering a Eurobond of its own. The bank says it may try to
redeem R500 billion of subordinated loans it received from the
central bank in 2008 during the crisis. The subordinated loan
is due in 2018 at an annualized interest rate of 8%, which
Sberbank believes is too expensive given current
International public offerings, which virtually disappeared
in 2009, have been surging in 2010. Russian equity was
bolstered by the announcement that GDP grew 4.5% year-on-year
in the first quarter.
Peter Westin, head of research at Aton Capital, notes that
Russias total external debt/GDP ratio of 39% and its
government external debt/GDP ratio of just 3% may offer
some protection from any overflow from Europes sovereign
Nonetheless, Russian markets [are] highly correlated
with global indices, and in particular with emerging markets,
[and] in recent years Russia has tended to correct more than
other bourses, he acknowledges.
Analysts anticipate some $1012 billion in IPOs
(initial public offerings) during the year. The biggest
blockbuster to date is Rusals $2.24 billion IPO in Hong
Kong in January. Even though the worlds largest aluminium
producers shares are trading 20% down from their January
offering price, more Russian companies will follow.
SOURCES OF CAPITAL
But there is a perception among some Russian shareholders
that Russian equities are undervalued compared to other
emerging markets. Russian companies have the highest earnings
per share but the lowest price/earnings ratio among Bric
(Brazil, Russia, India and China) economies. This fact, coupled
with low interest rates, has kept bonds popular, according to
Natalia Orlova, chief economist at Russias Alfa Bank.
The bond market is more important, given that
valuations are still quite good for the price level, says
Orlova. Shareholders are happy. However, the window of
opportunity may be closing for IPOs, and we may see an uptick
before the end of the year.
At least one planned IPO has been shelved. Prof Media, the
subsidiary of oligarch Vladimir Potanins holding
Interros, abandoned plans for a $1 billion offering in April
after receiving a credit line worth R7 billion from
state-controlled bank Sberbank.
Media reports suggest Metalloinvest, the Russian iron ore
mine and metallurgical company, is reconsidering an IPO after
deciding that more attractive financing options existed.
Plenty of other IPOs are still on tap. Companies
generally do an IPO if they can, otherwise they go for
bonds, says Mattias Westman, chief executive of
Prosperity Capital Management, the largest Russia and
CIS-focused portfolio investor in the world. They want to
be listed as a stamp of approval.
In late April, Russian pharmaceutical company Protek raised
$400 million in the largest IPO on local exchanges since
property developer LSR Group raised $772 million in 2007.
The successful completion of our IPO is a major milestone
in the development of Protek. We are confident that as a public
company we can continue to build on our track record of
achievements across the Russian pharmaceutical sector,
says company president Vadim Muzyaev.
IPOs planned for this year include seafood producer Russian
Sea Group, which is looking to raise $90 million with a
free-float of 18.9% on Russian exchanges, and rail-freight
operator TransContainer, which may sell up to 35% of its shares
on Moscow and international exchanges this year. TransContainer
is owned by state-owned Russian Railways, which may also float
a stake of its freight operator Freight One later this year.
SUEK, a leading coal producer, is considering a 10% flotation
valued at up to $1.5 billion in London in the second
Well continue to see international and domestic
listings across all sectors, says Arofikin.
Theres certainly going to be more to come in Hong
Kong. If were lucky, there could be up to $20 billion in
listings this year.
Low inflation, a strong rouble and economic growth keep
Russian bonds attractive. This year, inflation looks to be the
lowest in post-Soviet history. It was running at an annual rate
of 6.3% over the first four months of 2010, according to the
central bank. Its chairman Sergei Ignatiev predicts that it
will be 6.57.5% for the year.
The state has offered conservative growth estimates this
year, with prime minister Vladimir Putin recently predicting
that the economy will grow 3.1%. However, investment banks are
predicting that growth could reach as high as 78%.
Elsewhere in the CIS, companies are also returning
for now to the bond markets after a tough 2009.
In Kazakhstan, where leading banks defaulted and were
nationalized during the financial crisis, there has been
limited interest in Eurobonds. State oil company Kazmunaigaz
defied the bumpy market to sell a $1.5 billion, 10-year bond at
the end of last month the first Kazakh Eurobond since
the crisis. Although guidance had been set at 275bp over US
Treasuries, as markets deteriorated the deal finally priced at
347.7bp. State nuclear company Kazatomprom is also planning an
Few IPOs are on tap, either, perhaps because the oil-rich
central Asian country has the luxury of being able to look
elsewhere for funding. The Kazakhs always have the
alternative of raising money from the Chinese, says
Westman of Prosperity Capital Management.
Ukrainian companies are starting to wade back into capital
markets. Investors have reacted favourably to the recent gas
deal with Russia and the prospect of renewed IMF funding. If a
degree of political stability can be maintained, analysts
estimate total possible Eurobond issues of $3 $3.5
billion in 2010, including $11.5 billion of sovereign
borrowing, and several IPOs.
Among the companies looking to raise funds are DTEK,
Ferrexpo and Metinvest. In April, state bank Ukreximbank issued
a $500 million Eurobond at 8.375%, which was the first by a
Ukrainian entity since state energy company Naftogaz defaulted