In response to opposition from the finance ministry and central bank, regulators in Russia are reluctant to allow the two largest international clearing houses, Euroclear and Clearstream, direct access to the country’s newly established national depository. As a result, full liberalisation of Russia’s domestic bond (OFZ) market for foreign investors is unlikely to meet the previously-mooted July target, say analysts at Credit Suisse. “Local custodians are set to lose business if they [Euroclear and Clearstream] were to be given direct access to the market,” says Saad Siddiqui, research analyst at Credit Suisse based in London. “Reluctance by regulators to allow the big clearing houses direct access indicates that they are siding with local custodians for now,” he says.
Full liberalization would cause a shift of trading volumes from the onshore market and Micexto over the counter exchanges with little, if any, involvement of local exchanges, triggering a domestic regulatory backlash. “Local custodians are not against liberalisation but would like to delay it or impose additional restrictions on the mechanisms involved for additional protection to their own businesses,” says Alexey Pogorelov, research analyst at Credit Suisse based in Russia.
In addition, questions remain over taxation. “How will the final holders of OFZ be taxed after the introduction of the new scheme and one national depository? There is no full understanding of how everything will work as yet, and tax legislation has not been well prepared either,” says Pogorelov.
If liberalization finally takes root – most likely next year, say analysts - Credit Suisse predicts that there would be an inflow of between $5- $9 billion to the domestic Russian bond market. But regulatory risk might dampen inflows in the near-term to the lower band target, though, the long-term inflow prospects are bright, say analysts.
“The market is well positioned right now and inflation is favourable but exposure is limited due to current constraints,” says Edwin Gutierrez, portfolio manager, EM fixed income at Aberdeen Asset Management. He added: “But when liberalization happens is another question. I won’t be holding my breath.”