Page 80 - IFR Opportunities in Russian capital markets

CHAPTERBONDS 04 Background
The local bond market started life as one of many scams designed to dodge the currency control restrictions set up in the wake of the 1998 financial crisis to keep dollars in the country as the CBR strove to rebuild its reserves. Foreign investors found the money they had invested into the domestic sovereign bills, or GKOs, was trapped in special accounts. But once the CBR allowed investors to use this money to buy domestic bonds and then allowed them to sell these bonds and repatriate the profits, foreign investors began to retrieve their trapped cash.
“Corporate bonds were a non-market mechanism when they were first introduced in 1999. They were simply a scam designed to allow money trapped on special ‘S’ accounts [at the CBR] after the financial crisis of 1998, to leave the country”, says Dmitri Volkov, MDM’s director of domestic capital markets. “The first real ruble bonds were only issued in the summer of 2000.”
Over the last two years the flow of money reversed as these bonds became attractive investments in their own right and Russia’s ruble-denominated corporate bonds grew fast, allowing the country’s fastest growing companies to tap into a pool of otherwise inaccessible liquidity trapped in the fragmented banking sector.
Today the bond market continues to grow rapidly in size and liquidity. In 2006, the total amount of Russian issuances topped the US$100bn mark for the first time, with US$74bn outstanding on the domestic market and a daily trading turnover of US$500m by the end of that year.
Corporate bonds had grown to 45% of the local market as of December 2006 (see Figure 4.1), and now represent not only the largest but also the most dynamically growing market segment (Figure 4.2). The government was about to issue new local bonds in 2007, supporting the Ministry of Finance's OFZ bonds as a benchmark. Banks, retailers and power sector companies will remain the most active borrowers on the market in the medium term.
Figure 4.1: Russian bonds – sector breakdown, Dec 2006 (%)
Source: Cbonds
45%
Corporate
Sub-federal 45% Federal
10%
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