By Elliot Wilson
European lenders are desperately seeking to tap Russia’s rouble bond market in order to ringfence their local operations financially as Western sanctions against Moscow begin to bite.
A slew of sizeable rouble bond issuances this year has highlighted the desire on the part of eurozone lenders to limit their exposure to the world’s eighth largest economy.
Rouble bond issuance by European banks in the first nine months of the year hit $3.8bn, according to data from Dealogic, including sizeable debt sales by the likes of UniCredit, Rabobank and Rosbank, the local unit of France’s Société Générale.
Gunter Deuber, head of CEE currency and bond research at Raiffeisen Bank, another leading recent foreign seller of rouble bonds, says the rush to market has only just begun. “The market, for now, is deep and willing, and for the next six to nine months foreign banks will sell as much debt as possible — it’s a general trend among foreigners and Western banks,” he said.
“We are all thinking along those lines, whether you are talking about us or SocGen or UniCredit; we are all keen to source as much financing as possible locally, to limit cross-border exposures.”
But the long-term prognosis for a country that once provided a solid chunk of eurozone lenders’ earnings remains worryingly clouded. In September, Raiffeisen’s chief executive Karl Sevelda warned the bank would post a €500m ($630m) loss this year, as a direct result of the Russia-led conflict in Ukraine. In May, SocGen booked a $730m loss on the value of its stake in Rosbank, at the height of the crisis.
CRISIS OF CONFIDENCE
Deuber warned that while the rouble market could support the needs of most local and foreign lenders for the time being, he was “cautious about whether the market could viably meet [the bank’s] long-term” funding needs. The biggest concern, he said, was a rising crisis of confidence about the Kremlin’s current mindset.
“You have the feeling that Russian policymakers aren’t taking the state of their economy into account at the moment,” he said. “They aren’t thinking rationally. For a long time, Russia was integrating relatively well into international financial structures.
“But then you see it [regressing] like this, in such a short period of time. Definitely, no one operating there expected such a swift deterioration in business conditions. It has damaged a lot of trust that Russia had built up among foreign corporates over recent years.”
Nor was the reversion to an expensive rouble bond market an ideal outcome for foreign lenders, he added. “Yield levels are far more expensive in Russia, and they will only continue to rise as the economic pain worsens. And this is another reason why the current situation needs to be resolved. In the short-term, the banking sector can manage but not for too much longer.”
At some point, experts say, foreign banks may have to make a calculated decision about their operations in a country battered by sanctions, slowing growth, capital flight, rising inflation and an increasingly hostile business environment.
“For now, there are still corners of profit in the Russian market,” said Neil Shearing, chief emerging market economist at Capital Economics. “But the question is how long they can remain profitable in the face of a stagnating economy, or whether they should beat a retreat. If Russian growth levels continue to stagnate, the second option remains far more likely.”