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Revolutionising Russia’s capital markets

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Loans in roubles eliminate local borrowers' foreign currency risk.

Rouble loans are increasingly in demand.

Russia is back.

After the chaotic “nomenklatura capitalism” of the early post-Soviet years, through the debt default and rouble devaluation of August 1998, Russia is now firmly on the economic map, sitting as an equal among the rich and powerful Group of Eight.

The EBRD has long worked with all areas of Russian industry, helping to improve the business climate and to attract the foreign financing that Russia needs to flourish.

But, just as importantly, the EBRD has been a tireless supporter of change to the financial sector and specifically to the financial markets, the life-blood of any successful industrial democracy.

Broadening the market

The Bank has revolutionised Russian capital markets via its ground-breaking issues of rouble bonds, which have helped to broaden the funding base of the Russian market, establish a transparent benchmark for Russia debt and provide longer-term financing for the broad economy.

Background on local currency issues

The Bank has now raised 19.5 billion roubles via bond issues, launching a two billion rouble Eurobond in January 2007, following three domestic bonds issued earlier in the local currency for a total of 17.5 billion. The switch to tapping the Eurobond market for roubles was made possible by further currency liberalisation moves in Russia in 2006. The Bank had raised funds in a local currency for the first time in 1994 with the issue of a Hungarian forint bond.

EBRD issues 2 billion rouble fixed rate Eurobond - press release.

Despite many obvious benefits, raising money in the local currency is not an end in itself. Local currency bond issues alone do not stimulate market reforms. But they do go hand in hand with them.

“Local currency bond issues are not a panacea,” says Isabelle Laurent, the EBRD’s Deputy Treasurer. “The market conditions have to be right first.”

Preparing the ground

This includes the creation of an appropriate legal framework. The market also has to be equipped with indices against which to measure bonds. Preparing the ground can be a long process. In Russia it lasted several years.

The Bank has also been active here, working with the authorities to help create the laws covering such issues and playing a key advisory role in the development of the 2003 Securities Market Law that ultimately allowed international borrowers to raise money on the domestic market.

Once the background is right, the decision to issue domestic bonds becomes part and parcel of the EBRD’s transition mandate, in this case “To stimulate and encourage the development of capital markets in its countries of operation”.

Building up MosPrime

Another vital preparatory element prior to actually issuing rouble bonds was the Bank’s proposal and then support to Russia’s National Currency Association to create the Moscow Prime Offered Rates (MosPrime), a transparent money market index which is Russia’s equivalent of London’s LIBOR.

By May 18, 2005 everything was finally ready and the EBRD launched a five billion rouble, five year Floating Rate Note, the first ever such issue by an international borrower.

The EBRD launches first rouble bond issue in Russia - press release.

Nine banks underwrite new EBRD rouble bond - press release.

The benefits were clear and manifold. The proceeds from the EBRD's rouble bond provided long-term funding for municipalities and companies that produce or provide services primarily for the Russian market, including small and medium sized enterprises, thereby allowing them to better manage their liabilities and avoid exchange rate risk.

The creation of the index served as a benchmark for all other foreign banks who would want to raise money and then lend in roubles.

A senior executive of Citigroup, which had jointly led the bond for the Bank, said at the time that the issue showed the EBRD remained at the forefront of the development of local currency markets in the region. The deal and its accompanying elements were “tangible proof of the Bank’s commitment to Russia and the sophistication of its capital market operations,” said Citi’s Charlie Berman.

First syndicated rouble loan

The EBRD’s second rouble loan, launched in the spring of 2006, demonstrated even more starkly the inherent logic of local currency issuance, coinciding as it did with the launch of the first ever syndication of a long-term rouble loan, for the Moscow power company, Mosenergo.

EBRD leads first long term rouble loan syndication - press release.

The roubles had been raised and were immediately available for lending, with no conversion charges and no currency risk for the Russian borrower.

As with the inaugural bond issue, the long-term syndicated loan was seen as a precedent for other borrowers and for other international lenders who were also expected to link loans to MosPrime.

The EBRD’s recently-announced rouble loan to Russia’s HydroOGK is also fruit of the Bank’s rouble bond issuance programme, aimed at meeting surging demand from Russian clients for loans free of foreign exchange risk. HydroOGK is borrowing 6.3 billion roubles (€185 million). Of that, four billion roubles (€117 million) have been syndicated to nine banks.

“Our operating cash flows are in roubles so we are committed to borrowing in national currency to avoid exposure to foreign exchange risk,” says Vyacheslav Sinyugin, CEO of HydroOGK.

The HydroOGK financing is in two parts: the EBRD A loan, with a term (or tenor) of 14 years, and the B portion with a 10-year tenor. Says Mr Sinyugin. “No other Russian companies have ever had such long rouble-denominated loans, which result from EBRD’s confidence in power sector reform and HydroOGK’s financial stability and prospects.”

By Anthony Williams, Head of Media Relations
Contact: EBRD Treasury department

24 January 2007