To think that the market will rebound with full force and the same number of people will be needed to conduct this business over the next year or two is naïve.
Russian business is an important component of banks’ CEEMEA franchises, but let's face facts: the last two months have been a shutdown of the international bond markets, not a slowdown.
Not one bond from the country has been placed since Russian Railways’ deal at the end of February. And even if the bond market could perhaps re-open if political tension with the West eases, spreads are going to remain high and so supply will stay low. Russian issuers do not respond well to requests for high spreads — you only have to witness the recent reluctance of issuers to pay up in the domestic market to understand that issuers will likely hold off printing international bonds until they become the very last resort.
Investors do have short memories, and the sanctions lists have so far been kind to bondholders, but they would need to be goldfish-like to forget the last couple of months. Remember when Russian threatened that all its state-owned banks would default on their debts as retaliation to western sanctions? Remember when investors lost sleep the night before every new sanctions list was rolled out, wondering whether their positions were going to see them out of a job? Remember how every time the market looked like it was going to rally, another wave of fighting broke out in Crimea?
And from the banks’ point of view, even if the bond business does come back, how much of it can they arrange without front page headlines of them helping raise financing for a country that the US is currently being petitioned to call a “state sponsor of terrorism”?
VTB Capital, the Russian bank with the largest international presence, is publicly taking stock of its international bond market activities. This is undoubtedly in part because their funding costs have risen so much that to win this business has become more challenging, but also because their core business of arranging international deals for Russian issuers has been decimated.
It is not impossible that some Russian bond business could return in the second half of this year. But it is unlikely to return to full force quickly, and banks are still chopping headcount across all markets as they see fit. It is only a matter of time before they take aim at their bankers covering Russia.