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Yumashev, former president Boris Yeltsin’s chief of staff, who himself is now married to Yeltsin’s daughter Tatiyana. That makes him a member of the “Family” clan that ran Russia at the end of the Yeltsin-era.
But the other names on the list such as metals tycoon Viktor Vekselberg and Federal Council senator cum businessman Suleiman Kerimov are not obvious insid- ers. While any big businessman in Russia – and Vekselberg was an oligarch when Yelt- sin was still president 18 years ago – needs their “kyrsha” or roof (close connections with the authorities), neither man got rich through the classic path of participating in rigged privatisation auctions or taking cheap loans from state banks to fund corporate raiding. They are both simply well-connected clever businessmen.
By adding these names to the list, the Kremlin Report list suddenly becomes relevant again: it means anyone on that list, anyone at all that is worth over $1bn, is now a potential sanctions target. The upshot is all Russian assets are toxic again.
“We always consider EM risk and if we think that the political risk is going up then we stay away. Russia is still now on our watch list: there are other markets where we can make money and we will wait until the situation in Russia stabi- lises,” says Adrian van der Bok, senior portfolio manager at Dolfin.
That’s a big change. Russia has a total of $176bn worth of Eurobonds outstanding and they are all affected as a result to some extent. In the first six months following the imposition of the Crimea sanctions, all Russian assets were toxic as investors were afraid of new sanctions and it was not clear if they would get worse.
As it turned out there were more sanc- tions, however, each iteration was progressively milder, targeting generals that ran operations in Crimea and a few government officials. Investors relaxed and the equity market rallied strongly in 2016, rising by over 50% y/y while the spreads on bonds to US T-bills fell to only 180bp, as Russian assets were so cheap investors could no longer ignore them.
and the uncertainty of what will happen next means that compliance depart- ments in the international capital mar- kets just don't want to go there.
“In China [President] Xi [Jinping] has just been given unlimited rule. That means there is no political risk in China and he can concentrate on reforms. Chi- na could become the new Singapore. By taking the political risk off the table they have made the investment proposition simpler,” says van der Bok. “I don't want to stay up late worrying about head- aches. I could buy non-sanctioned Rus- sian bonds, but why bother? Buy Belarus and Ukraine instead. It’s simpler.”
Climbdown
Many investors hope that April 6 was the last round of escalation, and if tensions ease the market will recover much of its losses.
“We need to wait two to three months to see if the tone of talks between Russia and the US improves – if it does the market will reopen. The previous sanctions have shown that if one company is sanctioned then others still appeal to investors after the dust has settled,” says Shota Zhvania, the director of debt capital markets at Raiffeisen International. “Bottom line is that Russian assets are financially much stronger than most of their EM peers.”
In a surprise move on April 23 – two weeks before the 30 day deadline was due to expire – the USTD did an about face and relaxed some of the sanctions on Rusal, going as far as suggesting
that it would lift them completely if the company’s owner Deripaska sold his shares. The April 23 statement extended
Structure of Russian Eurobond issuers
the deadline for companies to wind down dealings with Rusal by five months.
It seems that the message was getting through: these sanctions are as painful for US investors, maybe more so, as they are for Russia.
The climbdown will come as a relief for the market and is a big win for Putin, who has been arguing that Russia can’t be isolated as it is already too integrated into the global market. But the climbdown doesn't solve the basic problem: who will buy the sanctioned assets? One possible buyer is China as the US has little leverage on the mostly closed Chinese financial market.
“The pipe is open and we are all selling at 20c-30c on the dollar but people that are not impacted by the sanctions like the Chinese will buy these securities and it will be a good trade for them,” says Benedetti.
The market was already bouncing back before the USTD relaxed its sanctions on Rusal. Russia is much stronger than it was in 2014. Budget cuts and efficiency gains mean the budget breaks even at around $60 per barrel of oil, and oil has already touched $75 in the midst of the fracas. Russia Inc is back in profit. At the same time Russian corporates have mas- sively deleveraged so they have relatively low exposure to the rest of the world. But the uncertainty remains.
“The big question now is whether this is a huge buying opportunity or the new norm? It depends on your perceptions over the question of if there will be more sanctions,” says Alexei Tchernitsev, head of fixed income trading at BSC Global Markets.
Now the game has been changed again
Source: Bloomberg, BCS
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