Page 85 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
Bond market structure
In 2006, a total of 239 bonds were placed and 26 issues of municipal and regional bonds worth a total of RUB540bn (US$20.7bn), which was double the number and value of issuances in 2005.
From the issuers’ perspective, the structure of the market has changed little year-on-year. The banking sector made up 38% of the total issuances, trading companies accounted for 14% and energy companies were the third biggest group, with 10% of the total in terms of value.
Among the largest corporate borrowers were Vneshtorgbank with RUB15bn, oil major LUKOIL with RUB14bn, the federal network company UES with RUB11bn, state-owned gas giant Gazprom with RUB10bn, and the state-owned Russian Railways with RUB10bn, as well as Gazprombank, the subsidiary bank of the gas monopolist with RUB10bn.
Moscow City and the Moscow region retained their leading positions among the municipal bond issuers, borrowing RUB30bn and RUB12bn, respectively. (Moscow City and St Petersburg City are the only two cities in Russia, which are classed as ‘regions’ in terms of the administrative structure of the country.)
The number and size of issues has more or less been doubling every year since 2001 and the tide of issues means the Russian fixed income market continues to deepen and become more liquid, with several bonds, such as those from Gazprom, Sberbank and Moscow City acting as effective benchmarks in their respective niches.
Rising turnover in all sectors
MICEX, which dominates bond trading, saw the turnover of corporate and municipal securities reach RUB3.71trn and the turnover on the OTC market reach RUB663bn.
The value and turnover of sovereign ruble bonds is rising too, with the CBR estimating the face value of all outstanding sovereign bonds to be more than RUB837bn.
The government policy of paying down its international debt early has had a profound affect on the domestic ruble bond market. The state paid off US$22.3bn of international debt early in 2006 – payments which are clearly seen in the Stabilisation Fund figures for the year – and resulted in an upgrade to investment grade by all three of the main ratings agencies, which translated into cheaper borrowing across the board and only fuelled the fire of issuances.
At the same time, the fixed income market got a fillip from the government's decision to lift the last of the currency controls in 2006 and make the ruble a freely floating currency. More investors followed the ruble into the domestic bond market as currency risk was reduced, attracted by the double gains from high yielding bonds and strong ruble appreciation.
According to MICEX, the monthly turnover of non-resident investments into non-government bonds increased from RUB19.6bn at the start of 2005 through RUB52.8bn at the start of 2006 to finish that year at RUB249.4bn.
Analysts are not sure if these exponential gains will continue in 2007 and once again point to oil prices as a significant contributing factor determining the direction of the market this year.
Inflation and interest rate challenges
With inflation running at over 10% and bond yields in the order of 8% in recent years, Russia's fixed income instruments have been earning negative real returns, which has stymied the development of the debt market.
The CBR has been trying to control both inflation and ruble appreciation by interventions on the foreign exchange market, but without a working bond market where bonds earn positive real returns the CBR's interest rate policy is not an effective tool for fine tuning economic growth.
The CBR has been moving Russia slowly towards the point where overnight interest rates will have an impact on the market and so give the CBR another badly needed tool of economic management. The point where the overnight rate exceeds inflation and so ‘turns on’ interest rates as a tool of monetary policy is approaching. However, the CBR is going slowly to prevent a sharp squeeze on liquidity and so spark another mini-banking crisis, as in 2004.
At the end of January 2007, the CBR took advantage of the successes in the fight with inflation in 2006 to lower the refinancing rate from 11.0% to 10.5% – still more than the average rate of inflation in 2006 – making the real interest rate, adjusted for inflation, 1.522%, according to Troika Dialog.
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