Page 86 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
As the CBR has set a (realistic) inflation target of 8% for 2007, economists are expecting more rate cuts, with the refinancing rate falling to 10.0% or even 9.5% by the end of the year.
It has also been developing a REPO market, which analysts expect to eventually become the cap on interest rates. At the start of 2007, the minimum REPO rate of for overnight refinancing was 6%, against the 8% inflation expected by the end of 2007.
"Refinancing operations are still not in great demand, as the interest rate is significantly higher than the rate of REPO operations. However, both rates tend to converge, so we expect the refinancing mechanism to be switched on once this happens. The timing will depend on oil prices; the lower the price, the sooner that domestic economy crediting will become a major driver of ruble liquidity injection," says Evgeny Gavrilenkov, chief economist at Troika Dialog.
Most economists agree that the CBR will continue to hike interest rates slowly up from the CBR's 3% overnight rate at the start of 2007, which will serve as the lower boundary for the time being. At the same time, the REPO rates will gradually become the cap to bound the upper limit; at the start of 2007 the CBR held the minimal rate for the REPO rates at 6% for overnight deals and 9% for three months. However, in both cases the changes will be very gradual.
In parallel, the CBR introduced a new CBR bond in February that will be used to soak up liquidity; Sberbank is expected to buy most of the issue.
MosPrime
In April 2005 the EBRD launched the Moscow Prime Offered Rate, otherwise known as the MosPrime Rate, to create a benchmark interest rate that would underpin the development of more sophisticated capital market transactions such as interest rate swaps by providing a realisable benchmark yield curve that was widely accepted by market participants.
The inaugural bond to use the rate was the EBRD’s own RUB5bn, five-year ruble-denominated bond that was issued in May 2005. MosPrime has been a big success. Since the launch of the rate the EBRD has floated a total of three ruble-denominated bonds worth RUB17.5bn that contributed to building out the curve, and MosPrime has become widely adopted by the market as the benchmark.
More recently, in February 2007 EBRD launched a RUB2bn 5-year fixed-rate ruble-denominated Eurobond swapped to MosPrime. And in March 2007 juice-maker Lebedyansky issued the first ever RUB1.5bn corporate bond with a coupon linked to MosPrime.
The rate has become the defining yield curve for the money-markets time deposits offered by the top tier of Russian banks to their peers. The rate is calculated for a range of periods up to six months and at least six banks contribute to the reference rate tables that go into calculating the rate, which are drawn from the approved banks: ABN AMRO Bank, Citibank, Gazprombank, International Moscow Bank, Raiffeisenbank Austria, Sberbank, VTB and WestLB Vostok Bank.
“We created the MosPrime rate to create the curve and allow the development of a three-month floating rate which people can believe in,” says Isabella Laurent, a senior banker at the EBRD who was the architect of the rate.
The rate has been particularly popular among mortgage lenders who were previously offering fixed-rate mortgages, denominated in dollars. As the volume of mortgage credits is more than doubling every year and hit a total of US$6bn of outstanding credits by the end of last year, the EBRD had the mortgage lenders in mind when they launched MosPrime.
“The bank doesn’t believe that it is healthy for the country if mortgage lenders are lending at a fixed rate in dollars. The volumes are now growing bigger. Next on the list of things to do is improve the payment system and rules that cover collateral are still not clear”, says Laurent.
Challenges to MosPrime development
The MosPrime rate was founded on the EBRD’s three bonds. The first two were for RUB5bn, with the most recent floated in May 2006 for RUB7bn. As the EBRD is a triple-A lender, these bonds very effectively define the floor for interest rates and so make an ideal basis from which to calculate interest rate spreads for the rest of the market.
However, there is still a lot to do. The legislation covering areas such as interest rate swaps is still a work in progress and despite a lot of discussion over the derivatives laws, these are still not complete. And unfortunately the Kremlin has taken the opportunity to introduce some protec- tionist measures in the laws. For example, while interest rate swaps are now covered in the newly-
79