Global Investing

Russian companies next stop for Euroclear

February 18, 2013

The excitement continues over Russian assets becoming Euroclearable.   Euroclear’s head confirmed last week to journalists in Moscow that corporate debt would be the next step, potentially becoming eligible for settlement within a month. Russian equities are set to follow from July 1, 2014.

What that means is foreign investors buying Russian domestic rouble bonds will be able to process them through the Belgium-based clearing house, which transfers securities from the seller’s securities account to the securities account of the buyer, while transferring cash from the account of the buyer to the account of the seller.

The Euroclear effect in terms of foreign inflows to Russian bonds could be as much $40 billion in the 2013-2014 period, analysts at Barclays estimated earlier this month.  Yields on Russian government OFZ bonds should compress a further 50-80 basis points this year, says Vladimir Pantyushin, the bank’s chief economist in Moscow, adding to the 130 bps rally in 2012. Foreigners’ share of the market should double to 25-30 percent Pantyushin says, putting Russia in line with the emerging markets average.

The next round will be the story of corporate bonds,  he reckons.

A roughly 100 billion-rouble ($3,3 billion) market where foreigners own less than 10 percent, Russian corporate bonds stayed flat last year even amid the roaring rally on government bonds. That blew out their yield spreads over the OFZ curve to 150-200 bps compared to 60-100 bps before the Euroclear-linked rally took off. Pantyushin expects that spread to compress back to the norm, first driven by Russian banks searching for yield, and second, when foreigners surge in.

The significance could be broader, however. With so much demand for local rouble paper, Russia could decide to issue less dollar debt this year (it has already said a planned $7 billion bond is unlikely to come in the next three months). Second, Russian companies will benefit if their borrowing costs fall.  Pantyushin says:

Our estimate is that foreign demand can substitute $10-$12 billion a year and potentially up to $20 billion, which local banks can direct into lending and corporate bonds. Last year for the first time consumer lending was on par with corporate lending.

Ed Conroy, a fund manager at HSBC Global Asset Management, reckons that Russian stocks, in general unpopular with foreign investors, may start benefiting as well.  Currently a lot of foreigners balk at buying Moscow-listed stocks because in the absence of a central depositary, they must bear the credit risk.  Once stocks become Euroclearable in 2014, the 20 most liquid Moscow-listed companies will be tradable on what is known as “T + 2″ basis, meaning the deal must be settled within two days of the transaction taking place.  If more foreign investors buy locally, it should in turn allow the privatisation agency to float state-run companies in Moscow rather than London. But even before that happens, there could be a spill over from bonds’ euroclearability, Conroy said:

Allowing more people to buy government debt will cut the cost of capital and will push down the cost of equity as well. The cost of equity is between 11-16 percent, that’s a very big risk premium.

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