Emerging Europe: Russia deal flow returns after Putin win
Sovereign taps Eurobond market; Sberbank to reopen privatization round
Banks are enjoying an upsurge in Russian deal flow thanks to prime minister Vladimir Putin’s winning bid to return to the presidency and the subsequent political quiescence in Moscow.
Investors are concerned about the Putin administration’s ability to stem Russia’s growing dependence on high oil prices. But in the short term bankers say Putin’s win on March 5, and the lack of any following civil strife, is facilitating debt and equity deals that were delayed partly because of the elections.
By mid-March investor meetings for a sovereign Eurobond (which had to wait until after the election) were already taking place in London and New York. Russia’s second dollar bond in the past 14 years, on March 28 the triple tranche raised the entirety of Russia’s $7 billion budgeted limit for external borrowing in 2012, and it was hoped it would open the market for other issuers (arrangers were BNP Paribas, Citi, Deutsche Bank, Sberbank and VTB Capital).
"In emerging market debt markets there has been more cash than issuers in the first part of the year," says Jonathan Brown, head of Europe bond syndicate at Barclays. "In this region, situations like the elections in Russia have meant that some issuers that may have come to the market postponed their plans, meaning issuance in the second quarter could increase."
Follow the sovereign
State-owned Russian Railways priced a new R25 billion ($855 million) seven-year Eurorouble bond at a yield of 8.3% on March 23 (JPMorgan, RBS and VTB Capital arranged the deal). Promsvyazbank has mandated Barclays, Citi and Credit Suisse for a new Eurobond. Russian Railways was similarly expected to follow the sovereign with a dollar tranche to its programme.
|Vladimir Yakunin, president of Russian Railways|
"Now the political situation in Russia is clear, foreign investors are more at ease," Vladimir Yakunin, president of Russian Railways, tells Euromoney during a bond roadshow in London. "This helps demand and encourages investors but was by no means a determining factor on timing for us." With elections over and the status quo at least temporarily intact, bankers reckon planned privatizations on the stock market are more likely in the coming weeks and months. Sources close to the situation say the central bank’s postponed sale of a 7.58% stake in Sberbank could happen as early as April.
"Investment banking in Russia has been on hold for the best part of the past nine months because of the elections," says one blanker. "Now Putin has a mandate from a large proportion of the population. That gives the government power to get things done. Privatization will be a key focus as the government tries to attract flows to the local stock market."
The sale of the stake in Sberbank, by far Russia’s biggest lender, is expected to raise about $5 billion. The bank is one of Russia’s most profitable, most liquid and best-researched stocks, so officials hope the deal could whet investors’ appetite for further privatizations on the exchange.
A recovery in Russian stock valuations in 2012 (partly thanks to eurozone quantitative easing) has bolstered prospects for sales of state assets. The central bank said earlier this year that it could look to sell the Sberbank stake once the share price rose above R100. This had already happened by late February.
At the end of 2011, aggregate capital outflows from Russia reached levels not seen since mid-2009. Partly thanks to the ebb of immediate political risks, analysts at Barclays now expect capital flight to slow. This might further encourage bond and debt issuance.
Putin won 64% of the vote in the presidential election on March 5. Nevertheless, in the longer term, the consensus among investors is that his position is less secure following the flaring up of a protest movement alleging fraud during parliamentary elections in December.
As the government seeks to allay middle-class frustrations expressed in the protests, an anti-corruption drive is expected to continue. According to Barclays research, there might have been a shift in attitudes towards corruption, signalled by such events as the arrest on charges of fraud in late February of Anatoly Ballo, deputy chairman of state development bank VEB.
Yet it remains unclear whether investigations will touch higher-level officials. And the anti-corruption drive might not be supportive of capital inflows, as people fearful of investigation are likely to move assets abroad.
Economists reckon the government will continue to pay off middle-class discontent through increases in pensions and public-sector pay. Although it is supporting consumer demand, federal budget spending, says RBS research, already rose 50% and 36% year on year in January and February, respectively, after having risen 22% year on year in the final two months of 2011.
The Russian government’s budget, according to the research, is now predicated on an oil price of $117 a barrel. That is four times higher than the government’s breakeven oil price a decade ago. Despite Putin’s win, Russia’s elite might be brewing up trouble for when oil prices fall, and investors know it.