Russia’s financial market infrastructure will only keep up with the investment boom if interest rate derivatives are introduced, Manfred Schepers, the EBRD’s vice president for finance said yesterday.
“Russia has the building blocks in place,” he told Emerging Markets in an interview. “But financial investors in Russia need the ability to use interest rate swaps to manage their own balance sheets – which you can’t do without futures – and to enable their clients to manage their interest rate risks. The need for these products grows as the volume of credit grows.”
Foreign exchange swaps are now the main product in the Russian derivatives market, comprising 95% of business. They are almost entirely traded offshore, due to the lack of a legal and supervisory framework.
An essential element, put in place with the EBRD’s support, has been the domestic Mosprime rate, introduced in 2005 and followed by the bank’s rouble bond issue, Russia’s first floating-rate note.
The bank has issued two further rouble bonds last year (5 billion roubles in April and 7.5 billion roubles in September). The floating rate on one of them is reset every month, helping to strengthen the Mosprime rate as a marker.
Another important step came in February this year, when the rouble became a settlement currency on the European market, i.e. convertible to all intents and purposes.
Isabelle Laurent, EBRD deputy treasurer and head of funding, said: “Developing a credit culture is difficult without derivatives. In the syndicated loan market, where the EBRD is very active, Mosprime has helped to increase volumes of business. Once you have an interest rate swap market you can really talk about credit pricing.”
Russian derivatives legislation is now being developed in consultation between parliamentarians, Russian banks, the currency exchange Micex and the International Swaps and Derivatives Association (ISDA). Schepers said that bankruptcy legislation is crucial because, without it, netting (mutual settlement of all outstanding liabilities between institutions, used in derivatives trading) can not operate.
Schepers urged Russian authorities to accept a framework that allows Russia to integrate with world markets, and the coexistence of exchanged-based and over-the-counter (OTC) derivatives markets. “I appreciate the history of the question, and why people are keen on a transparent exchange-based derivatives market. But coexistence with OTC and exchange-based markets is the classic model.
“It is also important that legal documentation is consistent across jurisdictions. Russia is integrating into the global financial market and becoming a very important player. But the legal basis must be consistent too.” ISDA global master agreements should be used.
Bankers working “at the coal face” with Russian businesses – where the economic boom is fuelling hunger for both debt and equity that it not always readily available – welcome the shift towards a domestic derivatives market.
Johann Jonach, chairman of Raiffeisen Austria (Moscow), told Emerging Markets: “Lenders are taking huge risks, because there are simply no means to protect themselves against unexpected events.”