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Russia borrowers strike bullish note over sanctions

While sanctions are hitting the Russian markets and pushing up interest rates, senior executives at Sberbank and potash producer Uralkali tell Euromoney the country’s banks and corporates are looking internally and to the east for new sources of financing. But with Russia sliding towards recession, liquidity is vanishing.

The sanctions climate in Russia is still holding a firm grip on the country, and speculation is rife about what the next move could be, from tighter controls to Swift blocking the use of its messaging services. 

The most recent round of EU sanctions were imposed to target the oil industry, but corporates outside of this are claiming it is business as usual.

 The rupee has been a notable beneficiary of this euphoria

Viktor Belyakov

With sanctions restricted to individuals considered within the close circle of Putin, it is a select number of businesses and banks that are feeling the effects of US and EU rulings. While these are among some of the best-known names, not all Russian companies are falling on the sanctioned list. 

Before leaving the company in September, Viktor Belyakov, chief financial officer of potash producer Uralkali, told Euromoney it would be mistaken to think that the imposition of sanctions means Russia is closed for business. 

“There are no government stakes in the company, so the probability of the sanctions introduced against Uralkali we consider as low,” he says.

This does not mean the shift in the climate has gone unnoticed. Cautious of the frequently expensive consequences of breaching sanctions, US and European banks have been withdrawing, which has been having a further impact. 

Says Belyakov: “The US banks have been cutting business. Some conservative European banks have been doing it too, although they do not need to. All of this is causing the increase in interest rates.”

As the US banks and the Europeans leave a gap in the market, there is space to be filled. Russia has been bullish on the ability to find the necessary financing internally, but whether or not the Russian banks are capable of doing this alone remains to be seen.

“There are a lot of discussions in the Russian press about whether the Russian banks can provide the funding needed on their own, says Belyakov, adding: “The banks are against the sanctions being introduced right now. Some Russian banks are able to provide funding on their own, as we recently signed a 10-year US dollar loan with Promsvyazbank. So there is some dollar liquidity in Russia.”

Commenting at the time of the Promsvyazbank loan, Belyakov says the new facility demonstrated the ability of Russian institutions to provide loans for domestic borrowers. This facility was obtained to refinance existing liabilities and investment programme. 

He adds now that the company does not need to raise any additional funding for some months. This is not, however, the case for all Russian corporates, with Moody's Investors Service estimating there is $112 billion to be refinanced. 

Feeling the pinch

Sberbank for one has been feeling the pinch, and president German Gref has spoken of how the bank is facing a colossal task to move towards obtaining financing from domestic banks. 

However, the bank is also open to other options. Sberbank took a prominent position at Sibos in Boston in September, seemingly undeterred by the sanctions imposed by the US and the EU that have left many banks in both regions, if not unable, at least reluctant to instigate new business.

In Europe, the bank is blocked from accessing the medium- to long-term markets. Despite some suggestion Swift might cut off the country from its messaging network, it has flatly denied it has any intention of blocking access to its services. 

Recent reports suggest Sberbank is looking to work with VTB on establishing an alternative network in case of a U-turn from Swift, but at substantial cost to the institutions.

This market space has left open the possibility of closer working with Asia. The steady stream of Asian bankers attending meetings with the bank at the conference were testament to the level of interest, although it remains to be seen how much business is done.

With the US banks they would ask what the minimum limits would be, while the Chinese banks ask if we would be OK with $1 billion. The Chinese are not afraid of big numbers
Evgeny Kaplin

Evgeny Kaplin, senior banker, managing director trade finance and correspondence relations division, Sberbank CIB, has seen increasing interest from the Chinese banks, which are buoyed by their considerable balance sheets.

“The Asian banks are coming in, and the Chinese banks are on top of the world, with the biggest balance sheets," he says. "With the US banks they would ask what the minimum limits would be, while the Chinese banks ask if we would be OK with $1 billion. The Chinese are not afraid of big numbers.”

Uralkali's Belyakov is also seeing this budding shift in market financing, saying: “There is additional interest from Asia. There is a good relationship with the Asian banks in Russia, and their levels of liquidity are very high. There is the chance of escalating business with the Asian banks if there is a decline from the US and Europe.”

Sberbank's Kaplin adds: “Other Russian banks may follow the lead to look to the Asian markets. There is presence from the banks in China and other countries.”

However, the move towards engaging the Asian banks will not happen overnight, and leaves the potential for a funding gap to open up in the interim. Russia has seen a noticeable shift towards the use of RMB, with yuan-rouble trades rising to $749 million in the year to August, although this still falls significantly behind the $376 billion recorded for US dollar trades in the same time frame.

And, as Belyakov mentions, the rise in interest rates will bloody corporates. The ban on imports and the slowing economic growth are hitting inflation. It stands at close to 8%, well above the 5% target of the central bank for 2014. 

And there is the possibility of interest rates being increased for a fourth time before the end of the year. None of which is helping the economy as it slides towards possible recession. 

Whether the Russian market can find enough funding and fast enough remains to be seen. 

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