Page 81 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 4.2: Russian bond growth, by sector, 2003–06 (% CAGR)
90 80 70 60 50 40 30 20 10
0
Source: Cbonds
Corporates
Sub-federal
Federal
In the 1990s Russia financed a whopping 7–8% budget deficit with bonds, the notorious GKO that paid yields of 20% on three months bonds at their nadir. At the same time, external debt was up over 100% until the whole house of cards came down on 17 August 1998 when the government defaulted on its debt.
Economic recovery
Devaluation of the ruble at the same time turned out to be a blessing in disguise. The overvalued ruble and the sky-high inflation of the 1990s led to banks speculating against inflation and caused a complete collapse of the payment system. The longer you could held onto cash which was converted into dollars, the bigger the profits. Devaluation put an end to this scam and resulted in the economy being remonetarised, which allowed small and medium-sized enterprises to take off once workers were being paid again in cash.
Fortuitously for Putin, oil prices also quickly recovered from their nadir of US$10/bbl and once they passed US$14 in 2000 the budget went into profit, as oil tax revenues were enough to cover the government's expenditure. The financial crisis radically transformed the nature of the Russian economy and started a virtuous circle of spending, investment and growth.
Since 2000, Russia has been awash in cash and the state has prudently made the most of the windfall to pay off all its external debt and build up not only its hard currency reserves but also to create the Stabilisation Fund to subsidise the budget should oil prices fall again.
By the start of 2007 Russia's external debt (sovereign and corporate) had fallen to under 10% of GDP from a mid-1990s high of about 80% of GDP.
Nowhere has this transformation of the health of Russia's public finances been more clearly seen than in the bond market, where the spread between Russia's sovereign Eurobonds and the benchmark US Treasury bills (T-bills) fell consistently until 2006, when it approached zero.
The corporate bond market reappeared in 2001 when domestic companies, enjoying the fruits of the start of a consumer boom, started to look for ways to raise money to fuel their ongoing expansion.
Since then, bonds have been getting bigger and longer as companies, municipalities and the state build out their yield curves. Russian debt was compared to Mexico, but now South Africa is used as a comparison.
Rating Russia
Russia scored a hat-trick of investment grade ratings in 2005. Corporate governance has improved dramatically among those companies that are eyeing the possibility of an eventual IPO or sale to a strategic investor. The problem is that not all companies see the merit of going public and these companies remain as opaque as ever.
There are concerns even with the more transparent companies. Natasha Page, head of Fitch Ratings’ Moscow office, says: “The problem is that no matter how much you know about a company in a big group, usually you have no clear of idea of what else is in the group.”
The danger is that one of an oligarch’s businesses goes bust and he turns to the other companies in his holdings for cash and brings several unrelated companies down in the process.
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