A SUPPLEMENT TO EUROMONEY – APRIL 1997Russia’s domestic capital markets are developing at an impressive pace. Companies wishing to raise equity or debt capital will continue to look to the international markets of course, but it may not be long before Russian entities can raise some finance in the domestic markets through bond issues. The Russian government’s own fund-raising activities account for this progress. The Russian treasury bill market (the GKO market) has grown from its start in 1993 to reach outstandings of over $40 billion today. A lack of domestic institutional investors means that foreigners dominate buying in the equity markets, but GKOs are a different story. The GKO market, from which foreigners were until recently excluded, has been able to attract substantial funds from Russian buyers. By far the biggest players have been Russian banks. Yields in the GKO market were extremely high, reaching a peak of 327% in January 1995. This made GKOs a far more attractive investment than the lending banks had intended. For borrowers, the high interest rates made it prohibitively expensive. But in recent months yields in the GKO market have fallen sharply. After-tax yield on a six-month GKO is now under 30%. This could make the domestic bond market more attractive to non-sovereign entities seeking to raise capital. At the same time, banks and investors in the GKO market are more keen to invest in non-sovereign paper as a way of regaining the higher yields they have lost as interest rates have come down. “In Russia 1997 is probably the year of corporate and municipal bonds,” says Robert Devane, head of fixed income at Troika Dialog. “It is now possible for blue-chip corporations, and even for a lot of second-tier corporations and municipalities or regions, to come to the market.” Some entities are already using the domestic bond market to raise funds. Devane cites the example of St Petersburg. “The city has developed a fairly good municipal finance programme, which has been up and running for about a year,” he says. “People are now accustomed to St Petersburg as an issuer it has developed a bit of a track record in paying off its debt.” Not to be outdone, Moscow issued its first municipal bond in February. Regions active in the market include the Republic of Tatarstan, a quasi-autonomous region whose bonds have also become popular with investors. Such issues trade at considerable spreads to GKOs. St Petersburg had to pay a yield of over 35% for a recent 14-month issue, for example, compared to just under 30% for 12-month sovereign issues in the GKO market. This is partly a factor of credit risk, but relative illiquidity and the poor market infrastructure in place for non-sovereign issues are also to blame. At present, the longest maturity in the GKO market is under two years, although, according to Devane: “We’re seeing a very aggressive extension of the market’s duration.” Devane predicts that, by the second half of the year, the domestic bond market could see maturities of up to five years. The main challenge in terms of the development of Russia’s domestic market is centralization. At present, regional issuers are able to sell their paper primarily to locally-based investors rather than the bigger players in Moscow. Both issuers and local brokers such as Troika Dialog are trying to develop the infrastructure necessary to integrate these disparate markets. Market participants hoping to develop the domestic bond market are putting their faith in veksels popular informal debt issues. Veksels are are a type of promissory note handed out by all types of Russian entities, ranging from small companies to regional governments. The market is virtually unregulated and hence subject to all sorts of abuses, but it has an estimated value of some $60 billion, making it even bigger than the GKO market. The hope is that funds invested in the veksel market will ultimately be transferred to Russia’s domestic bond markets. Monthly yields of GKOs across all maturities Source: Russian Economic Trends |
