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40 I Cover story bne May 2018
Clearstream to hook Ukraine and Kazakhstan up to international markets
bne IntelliNews
When Russia hooked its capital markets into the global financial system in 2012 it caused a revolution. Billions of dollars poured into the local government bond market from overseas and foreign investors now account for a record 34% of all the outstanding Ministry of Finance treasury bills, the so-called OFZ, or RUB785bn ($12.7bn) as of the peak this February.
The international settlement and clearing company Clearstream is hoping to repeat the experience by including more countries from the Eastern Europe into its system. Pilot programmes are already working in Armenia and Georgia and later this year the cash-strapped capital markets in Kazakhstan and Ukraine hope to join the party as well, says Clearstream.
As part of a comprehensive market reform that included merging the two largest exchanges – the dollar denominated Russia Trading System (RTS)
and ruble denominated Moscow Interbank Currency Exchange (MICEX) into Moscow Exchange (MOEX) – as well as setting up a central depository (CSD), the key part of the reform was making the whole domestic system compliant with the two international clearing and settlement companies Euroclear and Clearstream. Adding these two companies meant that investors in London and New York can buy and trade local government debt without going to the cost and inconvenience of setting up accounts with local brokerages. OFZ trades appear on their terminals everywhere in the world with a trading floor.
Compliance departments love the new arrangement as at a stroke you get
rid of a string of counterparty risks from banks and brokerages operating in someone else’s jurisdiction, not to mention the considerable costs savings that can be made. The local brokerages loved it less as it basically ended a business from which they earned lucrative fees, so the reform catalysed a trend that had already started – Russia’s private investment banks and broker/ dealers were rapidly taken over by Russia’s big state-owned banks and those that remained have shrunk in size and importance.
But for the government the shiny new capital market has been a godsend – especially in this time of sanctions. In the past the Russian government has issued some $7bn of Eurobonds a year to help finance the budget and Russian banks and companies have been even more active in tapping the long-term cheap money that can be found abroad. Now the domestic market is hooked up to London it has become even easier for all these players to raise money. The Russian budget deficit is increasingly funded by foreign investors, buying ruble-denominated assets
The Russian government is issuing up to RUB1 trillion ($16.1bn) of OFZ a year as international bond traders have largely ignored the political row between the Kremlin and the west. Russian OFZ have been the hottest emerging market bond for several years now as they pay hansom yields and are backed by Russia’s rock solid macro fundamentals. Drilling down into the ownership, and fully half of the fixed rate version of the OFZ are owned by foreign investors, according to MOEX.
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portfolio manager at Pioneer Invest- ment. “This is going to be the biggest change in our lifetime.”
Not selling the SDN listed assets is not an option. Otherwise innocent investors in sanctioned assets now face huge fines for simply being unable to own these assets. “Even eating the paperwork won’t help you,” one investor comments wryly.
There were clauses threatening bond holders with punishments in the CAAS- TA report issued in February too, but no one took them seriously.
“At first we ignored this clause as it was thought unlikely that it would be used. But people are not ignoring it now,” says David Stewart, a partner at the law firm Latham & Watkins. “We all use the same pipeline – Euroclear – and you can sell Rusal at 30c if you can find a buyer, and if the clearing houses will clear the deal, but none of that is a given,” says Stewart, who adds that the people on the SDN list are not being very helpful with trying to sort this mess out.
Even the settlement system Euroclear is in the crosshairs as the punishment doesn't just forbid holding the shares, it forbids doing any business with
the assets at all. That means even if a trader finds a willing buyer in China, for example, they have no way of transfer- ring the asset to its new owner.
Toxic nuclear waste
In the wake of the 1998 crisis Adam Elstein, managing director of Bankers Trust’s Moscow office, famously said: “I’d rather eat nuclear toxic waste than invest in Russian securities.” The SDN list sanctions have made most Russian assets almost as unpalatable.
The other part of the sanctions that has done a lot of damage was the seemingly random way the names on the list were chosen.
Russian aluminium owner Oleg Deri- paska, and the main target of the SDN List, is clearly a Kremlin insider. He is close to oligarch Roman Abramovich, who is widely thought to have hand-picked Presi- dent Vladimir Putin for his current job, and is married to the daughter of Vladimir