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Growing up awkward

Russia's nascent corporate bond market has been stunted by illiquidity, high yields, short maturities, punitive taxation, early put options and the lack of a properly functioning banking sector. And it is about to face its greatest test.

THE EVENT WAS a panel discussion of Russian debt held in Moscow in early September. Bankers and issuers were speaking with conviction about the rapid growth of Russia's infant domestic corporate bond market and diplomatically outlining potential pitfalls. Sergey Pakhomov, chairman of municipal debt at the City of Moscow, was the last to speak. He didn't pull any punches.

"I'm very pessimistic about the development of the Russian corporate debt market - it has a lot of time bombs hidden in it," he said. "The put options in these bonds mean this is short-term debt declaring itself to be long-term and corporates have to raise huge reserves to have the money ready for early redemptions. These bonds are either lying with corporates lending money to themselves or sitting with banks wanting to be credited as investment banks. The ratings agencies are scared and will downgrade promptly, leading to more early redemptions and possibly defaults. By a miracle, a default was avoided with Sibur [a Gazprom subsidiary] but a corporate bond default is inevitable and all the banks will get stung."

After a short, shocked silence, the audience burst into a spontaneous round of applause: quite an achievement in one of the closing sessions of a conference when people normally begin to turn their attention to lunch.

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