The wheels are turning in the Russian bond markets. The economy is buoyant, the rating agencies are busy awarding upgrades and Gazprombank, the Russian commercial bank to the gas industry, has signed the first Russian Euro-MTN programme since December 2000. But there is still work to be done. "The Russian sector is still only a very tiny proportion of the MTN market and is unlikely to become significant for a long while," says one MTN head of desk. But the potential is there. After a long period of caution, investors are now turning back to the Russian sector, and Gazprombank had to up the size of its debut euro150 million ($132.51 million) two-year issue to euro200 million to meet increased investor demand. "Investors are more confident about buying Russian paper and are less worried about the risk of default," says Eric Tanguy, associate director, corporate ratings at Standard & Poor's. "All of the big Russian oil and gas companies are looking at the bond markets. This sector has the best ratings of the Russian borrowers, and is likely to be the most involved in the debt markets in 2002." But Euro-MTN activity will be limited. Gazprombank's euro300 million facility, signed through its financial subsidiary, GazInvest, is only the second Russian signing since the 1998 defaults, and Moscow Narodny Finance, the last issuer to sign before GazInvest, has issued just once off its $250 million Euro-MTN programme. Peter Schikaneder, who works on Russian origination at Deutsche Bank, which arranged GazInvest's programme, believes that more Russian issuers will sign Euro-MTN programmes this year but that the majority of Russian borrowers will come to the market with stand-alone deals. He says: "Russian companies will come to the debt markets but they will do so on an annual or biannual basis via stand-alone bonds. Funding will come from single issues and not from structured private placements. This will take time to develop. New MTN signings will crop up here and there but they will be selective." Several Russian companies are lining up international bonds, including Vimpelcom, the country's second-largest mobile telephone firm, which will raise $250 million through a short-dated bond via JPMorgan and UBS Warburg, and Magnitogorsk Metallurgical Kombinat, Russia's largest steel manufacturer, which will launch a euro150 million three-year deal via Deutsche Bank. But the biggest boost to the Russian sector is the announcement last week that Russia will return to the debt markets for the first time since its 1998 crisis and issue up to $2 billion in Eurobonds. The decision follows Russia's recent upgrades from Fitch, Moody's and Standard & Poor's, which all felt Russia had made enormous gains in restructuring its debt. Russia's real GDP grew from nearly -5% in 1998 to just over 5% in 2001, and was a contributing factor to the increase of its B long-term rating to B+ by Fitch at the end of last year. Ed Parker, director, sovereign group at Fitch, explains Russia's turnaround. He says: "Over the past couple of years Russia has turned in an exceptional macroeconomic performance - one of the best in the world. The political scene is now much more stable with President Putin driving reforms. There have been major tax reforms, business deregulation and anti money-laundering reforms. The Russian government has worked hard to build a market economy in Russia." Schikaneder, at Deutsche Bank, agrees, and is confident that the government and company reforms have gone a long way to bolster the confidence of international investors. He says: "Russian corporates are going through a significant transformation process, which includes better liability management, greater transparency and improved corporate governance, and although defaults are not an impossibility it is not something that we consider a problem right now - nor is it something that is exclusive to the Russian corporate market."
January 18, 2002
