Beginnings of a resurrection seen in Russia’s battered capital markets

By bne IntelliNews October 7, 2015

Jason Corcoran in Moscow -


Russian corporates locked out of international capital markets for the past 11 months due to the Kremlin’s involvement in the Ukraine conflict can see light at the end of the tunnel.

A new agreement brokered in Paris on October 2 to hold elections in East Ukraine, along with a ceasefire and a continuing withdrawal of weapons from the front lines, boosted hopes that Russian companies will be allowed out of the funding purgatory imposed for President Vladimir Putin's annexation of Crimea and aggression in eastern Ukraine. The sovereign's credit default swap rates, which measures default risk, rallied by 29 basis points on October 5, after markets reopened. The ruble jumped 2% on the same day and is now at its highest since August 11 while Russia stocks rose as oil, the biggest revenue export earner, also advanced.

Norilsk Nickel, the world's biggest producer of Nickel, on October 7 sold $1bn in the first benchmark-sized Eurobond in a successful tilt to test the improved political temperature over Ukraine. The deal, which was the first bond issued by a Russian company in foreign currency since November, could over time open the floodgates for other issuers. Gazprom was this week roadshowing a possible euro-denominated bond in London, Frankfurt and Paris. Senior Moscow bankers told bne IntelliNews that Lukoil, the largest privately held Russian oil producer, is waiting in the wings with its own plans to test the bond market.

"The Paris deal over Ukraine could be a game-changer," the head of a foreign bank in Moscow tells bne IntelliNews. "Other blue-chips may jump into the market if Gazprom can also swing it, but I don't think it's compelling from an all-in perspective just yet as surely most would gag to pay junk levels when they are solid credits."

Some of Russia's largest companies can access ruble funding from the Central Bank of Russia (CBR) at 3.5-4.0% and fund themselves more cheaply by swapping that into foreign currency rather than going straight to the dollar and euro markets. Issuers have been in the dog-house for a year and may now realise there is a premium to pay for that status. 

Norilsk sold double what it was planning to and managed to secure a seven-year note yielding 6.625%, down from initial guidance of about 7%. That is the biggest deal from a Russian corporate since Gazprom sold a $700mn one-year bond last November. At the time, many issuers and bankers hoped Gazprom would crank open the market. Neither Gazprom nor Norilsk were sanctioned, but both have been effectively smothered by a refusal of international lenders to take any Russia risk.

Benchmark deals are crucial for other companies seeking to refinance existing borrowings and to plan future capital expenditure programs in the midst of Russia's deepening recession.   

Norilsk's placement could "open the door for issuance from other Russian corporates,"according to a note on October 7 from Sberbank CIB analysts. "The placement shows that international capital markets are not closed off for Russian corporate issuers, which is positive for the short-term outlook for Russia's current account."

This year alone, there was $16bn worth of euro and dollar Russian paper with a maturity date scheduled. Almost $4.5bn of that belongs to gas giant Gazprom while Rosneft, another state behemoth, must service or refinance $26bn in debt from the second half of this year till the end of 2016. "An outright lifting of the sanctions can’t be dialled back quickly," Tom Adshead, chief operating officer at Macro Advisory in Moscow, tells bne IntelliNews. "What we could see is a marginal softening as Ukraine gears up to take control back of its borders. That would manifest itself in the banking sector first with a nod from the very top to compliance departments to start softening their internal guidance on how sanctions are interpreted."

Good news from the edge

The timing of a revival in Russia's capital market may seem strange as Putin moves his military toys off one lawn and onto another, but the positive news flow from Ukraine seems to be outweighing developments in Syria – at least, for investors interested in Russia risk.

A ceasefire in eastern Ukraine in place since September continues to hold, while the summit in Paris between heads of Russian, Ukrainian, German and French governments made progress on a new election law that involves special status for rebel-held areas of Ukraine.

"If Russia cooperates on the Minsk 2 agreement, there is some talk that of some reward for Russia coming from the European side rather than the US," Adshead, whose firm advises international portfolio investors, says.

Some investors, however, remain to be convinced that Russia risk is back on the table. Paul McNamara, who manages $4.5bn in emerging market assets at the investment firm GAM in London, points to tthe Norilsk deal being made up of mostly European banks. "There’s no US banks in the syndicate, which is interesting for a US deal," McNamara tells bne Intellinews. "If Paris is a game-changer, then I am the Pope."

Financial sanctions preventing some Russian entities from raising money in international capital markets have been far more effective than sectoral sanctions, asset freezes and visa restrictions. Even Russian companies not sanctioned are suffering from contagion, as banks are unwilling to lend to any Russian company for fear of incurring the wrath of a US or UK regulator.

The inability of large companies like Rosneft to refinance their debts on the international market fuelled the collapse of the ruble and triggered a run on the banks in December. The oil giant sold a monster RUB625bn bond, which intensified pressure on the currency, as the market assumed it was to be used to buy dollars.

With equity and debt markets largely shut, the only limited activity in the past year has been through the syndicated loan market. Even there, only $3.2bn worth of deals have been made so far in a market that historically was worth about $50bn a year.

Uralkali, Eurochem, Metalloinvest, and Gazprom Marketing and Trading are some of the small band of companies that have managed to secure deals. Other names in the market now trying to close deals are coal miner SUEK  and steelmaker Novolipetsk Steel, which is struggling to close a deal worth $400mn following protracted haggling over pricing and "sanctions documentation", according to a senior banker working on the deal.

Putin's much-vaunted pivot to China has only resulted in piecemeal interest from Chinese and Asian banks in financing infrastructure projects of mutual interest.

Sanctions, the crash in commodity prices and the first recession since 2009 has decimated Moscow's investment banking community with many losing their jobs and the lucky few being relocated to London to work on other markets. Fees from mergers, bonds and equity deals for European banks dropped 61% to $42mn in the year to October 5, according to data provided to bne Intellinews by Freeman & Co in New York. Fees earned by US banks plunged 90% to a paltry $9mn over the same period. 

A reopening of Western debt markets could feed into the equity market and open the door to more deal-making. It could also lead to the lifting of informal bans on lending and new investments to Russian companies by international financial institutions such as the European Bank of Reconstruction and Development and the World Bank’s IFC private equity arm, according to Adshead. "Sanctions won't be lifted because they are formally linked to Crimea, but we could see a loosening of the interpretation and that's all we need to get the show back on the road," says Adshead, himself a former EBRD banker.

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