A BNP Paribas Investment Partner
Russian fixed income
and money market
2 - Russian fixed income and money market
For professional investors
3 - Russian fixed income and money market
A market in transition
•Access to the domestic Russian bond market is
•Monetary policy continues to shift to inflation
due to become significantly easier in the second
targeting and a free-floating rouble. This is
half of 2012 with the creation of the central
resulting in
securities depository (CSD) and the ability of
foreign nominees to open accounts.
a)progressively fewer interventions by the
Central Bank of Russia (CBR) in the domestic
•Government bonds will become euro-clearable
currency market;
first, followed by corporate bonds.
b)Russia’s international reserves becoming
•With the increase of international investor
more stable; and
volume in the local market, volatility and yields
can be expected to decrease.
c) monetary authority net foreign assets, which
had been a chronic contributor to inflation
•The domestic market is currently 40% larger
than the total issuance of eurobonds, with a
spread pick-up of 300-500bp.
from 2000 to 2008, having less effect on
growth in the money supply.
Since inflation has been slowing, interest
rates will become a more important
•Liquidity in rouble corporate bonds is generally
policy tool, with the CBR using reserve
acceptable up to three years’ duration. About half
requirements, among other tools, to inject
the issues have a duration of less than two years
or absorb liquidity into the banking sector.
and 30% have a duration from two to five years.
Most of the paper matures or has a put option
within two years.
•Liquidity in cross-currency and single currency
swaps is acceptable up to 12 months, which
makes such markets the main point of access for
exposure to Russian rates.
For professional investors
4 - Russian fixed income and money market
Monetary policy
The CBR’s monetary policy objectives are to keep the rouble
stable, develop and strengthen the banking system and ensure the
reliability of the payments system. In reality, the bank has relaxed
its rouble targeting since 2009 in favour of inflation targeting.
• Standing credit facilities for up to six months when standard
tools are insufficient
• Non-marketable collateral such as letters of credit
• Non-collateralised lending (in times of extreme market stress).
Over the past decade, Russia has benefited from strong revenues
from exports of crude oil, natural gas and other commodities,
leading to large current account surpluses. To prevent excessive
rouble appreciation before 2008, the CBR sold roubles against
foreign currency, but could not adequately sterilise the ensuing
increase in rouble supply. This was the key reason for abundant,
and relatively cheap, liquidity in the banking system and the
rapid double-digit rise in inflation between 2000 and 2008.
Liquidity is also provided by the Ministry of Finance, which
places deposits with the top-30 or so banks as it accrues
revenues throughout the year, but it has historically weighted
proportionally more budget expenditure towards the end of the
year. This Ministry activity should diminish as budget execution
improves, leaving the CBR as the primary source of liquidity.
The significant change since 2008 has been the transition to
what is today a managed float, allowing the rouble to fluctuate
far less rigidly within the desired corridor of its currency basket
despite ongoing strong current account surpluses. As we see in
the diagram below, the corridor has been progressively widening
at the same time as the CBR has eased its rules to allow ongoing
adjustments.
• Deposits at the CBR can range from one to seven days and have
fixed interest rates
• Open market operations:
- Deposit auctions with a one-month maturity
-Issuance of its own debt paper, OBRs, for maturities of up to
three months
-Sale of GKOs (short-term government bonds).
Rouble versus its currency basket
Key policy rates
Liquidity absorption:
Note: The basket comprises USD 0.55 and EUR 0.45
These are the key policy rates:
RUB
42
Low limit
40
Top limit
38
36
34
32
30
28
jan.06
Basket value
jan.07
jan.08
jan.09
jan.10
jan.11
jan.12
Source: IMF, 2012
The CBR can by law use a number of monetary policy tools,
including interest rates on CBR operations, reserve requirements,
open market operations, currency interventions, the setting of
money supply targets and bond issues.
A key tool is the absorption and supply of liquidity through the
use of the tools outlined below, these being driven more by the
fragmented nature of the banking system rather than by any
efficiency measure.
Liquidity supply:
• Credit from the CBR in exchange for the ‘Lombard list’ of
acceptable collateral. The Lombard list essentially comprises
marketable collateral such as government bonds, B- or higherrated bonds from mortgage agencies, municipalities, corporate
and international financing agencies and local mortgage bonds
rated BB or higher
• Standing facility fixed-rate credits that can be obtained on
demand (overnight, one-day repo auction, etc.). The one-day
repo auction is the most important source of short-term CBR
financing for banks
• Refinancing rate: The overnight rate for cash loans from the CBR
meant to be the reference rate for financial markets. In reality, it
has no monetary policy significance and is primarily a reference
and accounting measure. For example, it is the maximum
reference rate that banks may offer for deposits to households
and is used to calculate overdue interest on payments
• Overnight credit rate, equal to the refinancing rate
• One-day deposit rate: The level at which the CBR accepts
deposits from banks and effectively the lower limit for
interbank interest rates
• One-day repo rate: Effectively the upper limit for interbank
interest rates.
The spread between credit and deposit rates has been shrinking
from the wide pre-crisis levels, with the CBR systematically
reducing credit rates and raising deposit rates to lessen the
volatility of interest rates in the interbank markets. Daily
information on all the different measures is published by the
CBR, with the main measures being the banks’ current account
balances with the CBR, their deposits and the balance of CBR and
bank operations.
The problem with the use of interest-rate policy tools is their
sheer number, the fact that their rates differ widely and are not
changed simultaneously, and the fact that the CBR has not yet
fully transitioned to inflation targeting. Because of this, reserve
requirements for banks remain important. While the required
reserves are generally greatly exceeded by banks in terms of
their reserves and deposits with the CBR, the use of reserve
requirements remains a tool which can be reduced significantly
during times of market stress. For example, reserves to cover
liabilities are at 4%-5.5 % today compared to the 0.5% required
at the peak of the crisis between October 2008 and April 2009.
For professional investors
5 - Russian fixed income and money market
Money market
According to the CBR, as of end 2011, there were some 980 banks
operating in Russia, with nearly 50% of total assets concentrated
within the top five – all of which are state-owned. The banking
sector is generally fragmented, as demonstrated by the many
regional banks that are the only providers in their regions across
the vast territory of the Russian Federation, by enterpriseaffiliated banks and by banks operating in niche areas such as
capital exports, currency exchange or securities transactions.
This fragmentation has a number of implications:
• Contrary to popular opinion, the fact that the banking sector
is fragmented tends to protect it from the systemic effects of
individual bank failures
• The interbank market is characterised by a lack of trust due
to the poor judicial environment and limited protection of
property rights, resulting in small banks being effectively
excluded from the money market; most access short-term
financing only via the CBR
• Liquidity across banks can vary greatly, posing an ongoing
challenge for the effectiveness of CBR monetary policy.
In this environment, only the top 150-200 banks can access
liquidity through the interbank market, which results in a failure
of the system to adequately allocate liquidity. This has resulted in
a wide range of interbank market reference rates, most of which
are far below the current inflation rate.
Date
1 day
from
2 to 7
days
from 8
to 30
days
from 31
to 90
days
from 91
to 180
days
from
181
days to
1 year
MIBID (Moscow InterBank Bid)
26.06.2012
5.51
5.63
6.08
6.58
6.97
7.45
MIBOR (Moscow InterBank Offered Rate)
26.06.2012
6.24
6.44
6.86
7.43
7.77
8.45
MIACR (Moscow InterBank Actual Credit Rate)
25.06.2012
5.91
8.18
7.75
8.46
-
-
MIACR-IG (Moscow InterBank Actual Credit
Rate - Investment Grade)
25.06.2012
5.54
-
-
-
-
-
Credit rates
(% p.a. for rouble credits)
MosPrime Rate* (Moscow Prime
Offered Rate)
Date
Overnight
1W
2W
1M
2M
3M
6M
26.06.2012
6.38
6.51
6.62
6.85
7.01
7.18
7.32
This is the National Foreign Exchange Association (NFEA) fixing of the reference rate based on the offered rates of Russian rouble deposits as quoted by eight
contributor banks judged to be leading participants of the interbank market
RUONIA (Rouble Overnight Index Average)
Date
RUONIA rate, %
Volume of
transactions which
produced rate
calculation, RUB bn
25.06.2012
5.72
103.72
Source: CBR
Foreign exchange market
The Russian rouble was made fully convertible on 1 July 2006.
Foreign currency trading takes place via Russia’s main stock
exchange, the MICEX-RTS, where EUR/RUB and USD/RUB are traded
with same-day delivery. The CBR monitors the value of the rouble
versus a bi-currency basket (USD and EUR) and the number of
interventions has been falling since 2009 in line with an increased
focus on inflation targeting. CBR intervention is conducted through
the MICEX-RTS and is anonymous, with most intervention in USD/
RUB (around 80%) while the remainder is in EUR/RUB.
While the rouble is deliverable, non-deliverable forwards tend to
dominate client flows, with NDF fixing determined by a group of
15 locally resident international and local banks. Average daily
trading of foreign currency on the MICEX-RTS was some USD 12
billion during 2011 and stands at USD 14 billion so far in 2012.
For professional investors
6 - Russian fixed income and money market
Domestic fixed income market
Russian government bonds
The domestic Russian fixed income market consists of government,
regional, municipal and corporate bonds, and is characterised by:
The size of the Russian domestic government bond market is
today just below USD 100 billion, with a monthly trading volume
of USD 10-15 billion.
• Relatively low liquidity versus global markets – the booming
pension fund industry is essentially a buy-and-hold fixed
income buyer
• Bonds of lower duration than eurobonds
• Larger number of issuers than eurobonds.
Last year, the Russian government stopped issuing Treasury
bills and concentrated on the bond market. Federal government
bonds are called OFZs (Obligatsiya federalnogo zaima), or Federal
Loan Obligations. They are issued by the Ministry of Finance with
maturities ranging from one to 30 years and can have any form
of coupon (other than floating). Liquidity in these instruments is
available for up to 10 years. OFZ-PD (Fixed rate bonds) issued
since 2008 have? fixed coupons and bullet redemption and are?
eligible for inclusion in the GBI-EM index. Russia only entered the
GBI-EM and GBI-EM Global indices in 2006 after capital controls
were removed. It now represents a reasonable proportion of the
indices, at 7.8% and 8.8% respectively. This index weighting is a
lot higher than the actual allocation of many EM local currency
bond funds to Russia, indicating the asset class is significantly
underweight and should expect inflows from large benchmark
investors once the current deficient infrastructure is improved
(see the last section of this report, “Investor base in domestic
fixed income, today and tomorrow”). In addition, we expect the
weighting of Russia in the indices to increase with future debt
issuance and improved liquidity conditions.
The government also issues non-marketable, fixed-rate savings
bonds. These GSOs (Government Savings Bonds) are aimed at
institutional investors such as pension funds.
Today, OFZs account for 41% of the total Russian bond market
volume while regional bonds account for 5%. The domestic bond
market has exceeded the size of Russian eurobonds in terms of
total outstanding issuance.
Structure of Russian bond market
Overall
USD 397 bn
Domestic
USD 230 bn
Eurobond
USD 167 bn
Structure of local sovereign borrowing
3500
3000
State treasury bills and federal loan bonds, RUB bn
Bank of Russia debt, RUB bn
2500
2000
1500
1000
500
0
dec.00 may.01 may.02 may.03 may.04 may.05 may.06 may.07 may.08 may.09 may.10 may.11 2012
Source: Cbonds, 2012
As of end-June 2012, total outstanding rouble-denominated
sovereign debt is equivalent to 8.7% of GDP. The main reason for
its relatively small size is that the federal budget was in surplus
from 2000 to 2008, which made borrowing unnecessary. During
that time, annual government domestic debt issuance was
relatively small, at RUB 170–250 billion (circa USD 5-8 billion,
using USD1=RUB33) and OFZs were mainly issued to provide the
bond market with a reference rate.
The situation has changed significantly since 2009, when the
domestic market started to be considered as the main source
of budget deficit financing, no doubt due to a depreciated rouble
making eurobonds relatively more expensive. Since this time,
issuance has increased as follows:
2009
2010
2011
2012*
New issues by Bank of
Russia, USD bn
10.2
70.8
16.1
0.0
New government debt
issuance, USD bn
12.7
21.7
22.9
7.7
Amount outstanding (Bank of
Russia), USD bn (EoP)
8.8
18.0
0.0
0.0
Amount outstanding (OFZ),
USD bn (EoP)
44.5
62.2
84.9
89.9
* 31 May 2012
Municipal and
subfederal
USD 12.6 bn
Govt
USD 95.7 bn
Corporate
USD 120.8 bn
Sovereign
USD 23 bn
Corporate
USD 144 bn
Source: Cbonds, 2012
The European Bank for Reconstruction and Development (EBRD)
also regularly issues rouble-denominated bonds to help develop
the domestic market and has raised RUB 40.5 billion since 2005
via nine issues.
For professional investors
7 - Russian fixed income and money market
Primary auction and placement mechanisms
Russia does not yet have a primary dealer system in place and
does not have a pre-announced auction schedule for domestic
debt issuance.
Auctions are conducted in a multi-price format with the Ministry
of Finance announcing the details of the issue one day before the
sale, including the bond being issued, the amount of issuance and
Auction calendar
the number of bids that may be submitted for non-competitive
form to be filled at the auction average (maximum 25%).
As previously mentioned, the CBR may also sell more bonds in
the secondary market.
Primary market
Treasury bills
None at present
Agent
Central Bank of Russia
Government bonds
Variable, weekly, Wednesday
Range of issue size
From RUB 5 bn to RUB 50 bn
Bids in by (time)
12:30 Moscow time
Bid format
Clean price to two decimals
Results out by (time)
13:15-13:30 Moscow time
Settlement
T+0
Option to buy more
No
Participants
No restrictions
Multi-price format
Yes, you pay what you bid
Information/website
http://www1.minfin.ru/en/
Non-competitive amount
25%
Secondary market
Russian government
bonds (RFLB)
Parameters of existing
securities in issuance
Trading possibilities
MICEX-RTS and OTC
Issuer
Ministry of Finance
Average daily volume
RUB 15-20 bn/day
Minimum denomination
RUB 1000
Average transaction size
RUB 50 mn
Coupon
Fixed, step-up, step-down,
zero-coupon
Normal bid/offer spread
RUB 0.10
Redemption
Bullet / amortised annually,
semi-annually, quarterly
Settlement
T+0
Coupon frequency/day
count
Actual/365
Custodian
National Settlement Depository
(NSD)
Clearing
MICEX
Foreign investment
restrictions
No
For professional investors
8 - Russian fixed income and money market
Domestic corporate bonds
The domestic corporate bond market grew 20-fold between 2004
and 2011 and now stands at some USD 120.8 billion. Domestic
bonds are usually issued with a maturity of up to 3.5-4 years,
making the overall market duration low, at around 2-2.5 years.
During the last decade, there have been no defaults in Russian
investment-grade corporate bonds or municipal or sub-federal
bonds. Default rates in high-yield bonds are 0.5%, which compares
favourably to 2% in the US.
Outstanding corporate bonds
Rating breakdown of domestic corporate issuers
4000
AAA
0.19%
AA
none
2500
A
0.30%
2000
BBB
40.74%
1500
BB
28.38%
1000
B
12.25%
CCC and lower
0.16%
Unrated
17.99%
3500
Corporate bonds (Russia), RUB bn
3000
500
0
dec.00 may.01 may.02 may.03 may.04 may.05 may.06 may.07 may.08 may.09 may.10 may.11
Source: Bloomberg, as of 29/05/2012
Source: Cbonds, 2012
The monthly trading volume in corporate bonds is USD 10-15
billion among 347 issuers and 812 bond issues, similar in size to
the Brazilian market (total size USD 130 billion) and about double
that of the Mexican market (USD 70 billion).
Top 20 local issuers
Name
rating
sector
amount outstanding
% of the
overall
market
RUSSIA GOVT BOND - OFZ
BBB
SOVEREIGN
3 055 359 687 000
41.61%
CITY OF MOSCOW
BBB
GOVT REGIONAL
246 233 188 000
3.46%
RZD
BBB
TRANSPORTATION
200 053 000 000
2.81%
VTB 24
BBB
BANK
151 692 920 000
2.13%
AGENTSTVO PO IPOTECHNOMU
BBB
GOVT AGENCY
142 520 000 000
2.00%
ROSSELKHOZBANK
BBB
BANK
135 000 000 000
1.89%
TRANSNEFT
BBB
ENERGY
135 000 000 000
1.89%
FED GRID UNIFIED ENERGY
BBB
UTILITY
115 000 000 000
1.61%
VEB-LEASING
BBB
FINANCIAL
110 000 000 000
1.54%
GAZPROMBANK OJSC
BB+
BANK
85 000 000 000
1.19%
MOBILE TELESYSTEMS
BB
TELECOMMUNICATIONS
85 000 000 000
1.19%
B+
BASIC MATERIALS
85 000 000 000
1.19%
GAZPROMNEFT
MECHEL OAO
BBB-
ENERGY
78 000 000 000
1.09%
VIMPELCOM-INVEST
BB-
TELECOMMUNICATIONS
75 000 000 000
1.05%
BASHNEFT OAO
BB
ENERGY
70 000 000 000
0.98%
SIBMETINVEST
B+
INDUSTRIAL
70 000 000 000
0.98%
MMK
BB
BASIC MATERIALS
48 000 000 000
0.67%
NR
INDUSTRIAL
46 280 000 000
0.65%
NLMK
UNITED AIRCRAFT CORP JSC
BBB-
BASIC MATERIALS
45 000 000 000
0.63%
LUKOIL JSC
BBB-
ENERGY
41 000 000 000
0.58%
Source: Bloomberg, as of 29/05/2012
For professional investors
9 - Russian fixed income and money market
Domestic bonds versus eurobonds
In March 2012, Russia borrowed in the eurobond market
after a two-year break. In a placement that was three times
oversubscribed, USD 7 billion in dollar bonds was issued with
maturities of five, ten and 30 years offering yields of 3.3%, 4.6%
and 5.8% respectively.
After the Russia’s 1998 default on domestic bonds, the country
borrowed no money abroad until 2010, when USD 5.5 billion of
sovereign bonds were issued. To put the decade-long absence
from international bond markets in a historical context, after
the fall of the Soviet Union in 1991, the new Russian Federation
assumed responsibility for the entire USD 100 billion of former
USSR debt, while at the same time requiring a financial injection
to undertake the painful transition from a centrally planned
economy to a market-driven one. This was an enormous challenge
for a transition economy, particularly at a time when resource
prices – the major export of Russia – were very low.
As a result, the 1992-98 period was characterised by negotiations
with the Paris and London clubs of creditors, irregular debt
payments, deferral of payments, rollovers, restructurings,
massive issues of domestic rouble-denominated short-term
treasury bonds (GKO and OFZ) and the first eurobond issue in
1996. By early 1998, Russia had amassed USD 180 billion of debt,
or 66% of GDP.
The country suffered a classic currency crisis in 1998: essentially
a speculative attack on the rouble that resulted in forced
devaluation and subsequent default on private and public debt.
Russia was vulnerable to this for a variety of reasons:
• Rising fiscal deficits could not be controlled due to low revenues
(oil at USD 11 a barrel) and mounting interest payments
• Extremely high lending rates to banks (of up to 150%) created
yet higher domestic debt repayments and lack of credit in the
real economy
• An exchange rate peg that the CBR was willing to defend by
depleting foreign exchange reserves … until such point as the
government could no longer defend the currency by buying
roubles.
On 13 August 1998, the Russian stock, bond and currency markets
collapsed. Faced with little choice, the government floated the
exchange rate four days later, devalued the rouble and defaulted
on its domestic bonds and Soviet-era debt including the Paris
and London club obligations. It declared a 90-day moratorium on
payments by commercial banks to foreign creditors.
The Russia of 2010 issuing eurobonds for the first time postdefault was a very different country to the post-USSR Russia due
to significant deleveraging.
In the immediate aftermath of the default, in 1998-2000, there
was:
• A positive import substitution effect after the rouble collapse,
combined with an increase in exports
• A re-structuring of domestic bonds, agreement with the IMF
and new agreements with the Paris and London clubs of
creditors.
Subsequently, from 2001 to the present, we have seen:
• Russia graduate from debt re-schedulings very quickly, with all
payments made on time
• Improved fiscal policies resulting in a consistent federal budget
surplus…the first in 2000
• Creation of stabilisation funds to take advantage of budget
surpluses arising from increases in world prices for Russia’s
oil, gas and commodity exports
• First ever investment rating awarded by Moody’s in October
2003
• Sound monetary policy
• Gross reserves peaked at USD 598 billion in 2008 and are USD
512 billion as of mid-June 2012.
The amount of state eurobonds outstanding has been relatively
steady in recent decades, while the corporate bond market has
grown from zero to USD 125 billion in the last ten years.
In general, the USD-denominated eurobond market could be
characterised as offering:
• Lower yields than equivalently rated rouble-denominated
bonds, in the range of 300-500bp
• Better liquidity.
Historical development of Russian eurobond market
180
Eurobond corporate issuers rating breakdownissuers
AAA
0.00%
140
AA
0.00%
120
A
0.00%
80
BBB
62.46%
60
BB
22.87%
40
B
7.21%
CCC and lower
0.00%
Unrated
6.27%
160
Corporate eurobonds (Russia), USD bn
State eurobonds (Russia), USD bn
100
20
0
dec.00 may.01 may.02 may.03 may.04 may.05 may.06 may.07 may.08 may.09 may.10 may.11
Source: Cbonds, 2012
For professional investors
10 - Russian fixed income and money market
Top 20 Eurobond Issuers
Name
amount outstanding
% of the
overall
market
rating
sector
RUSSIA SOVEREIGN BOND
BBB
SOVEREIGN
42 743 000 000
25.63%
GAZPROM
BBB
ENERGY
26 343 543 527
15.79%
VTB BANK
BBB
BANK
8 594 280 373
5.15%
SBERBANK
BBB+
BANK
6 500 000 000
3.90%
VIMPELCOM
BB-
TELECOMMUNICATIONS
6 100 647 000
3.66%
LUKOIL
BBB-
ENERGY
5 000 000 000
3.00%
VNESHECONOMBANK
BBB
BANK
4 850 000 000
2.91%
RSHB (OJSC RUSS AGRIC BANK)
BBB
BANK
4 730 754 000
2.84%
TNK-BP
BBB-
ENERGY
4 500 000 000
2.70%
TRANSNEFT
BBB
ENERGY
4 327 030 000
2.59%
ALFA BANK
BB
BANK
3 791 505 000
2.27%
RUSSIAN RAILWAYS
BBB
TRANSPORTATION
3 518 550 000
2.11%
GAZPROMBK
BB+
BANK
3 511 256 000
2.11%
EVRAZ GROUP SA
B+
BASIC MATERIALS
3 069 773 000
1.84%
SEVERSTAL
BB-
BASIC MATERIALS
2 418 552 000
1.45%
BANK OF MOSCOW
BB+
BANK
1 950 000 000
1.17%
PROMSVYAZBK
BB-
BANK
1 550 000 000
0.93%
ALROSA
BB-
BASIC MATERIALS
1 500 000 000
0.90%
NOMOS BANK
BB-
BANK
1 450 000 000
0.87%
NOVATEK
BBB-
ENERGY
1 250 000 000
0.75%
Source: Bloomberg, as of 29/05/2012
Over the past decade, there have been 12 defaults among
eurobond issues, all of them sub-investment grade: Evrocommertz,
Mejprombank, Energomashcorporation, Gallery Media, BTA
Bank, Finance Leasing, MG Group, Maretex, Nutrinvestholding,
RosBusinessConsulting, Sunway Group and Ritzio International.
Investor base in domestic fixed income: today
and tomorrow
There is no detailed information on the investor base for
domestic bonds. Most high-grade issuance is bought by the
largest state-owned banks, by banks with foreign ownership
and by state and non-state pension funds. The pension fund
segment is growing substantially and is a major bond buyer due
to the peculiarities of domestic regulation which do not permit
non-state pension administrators to show principal losses
within their calendar-year accounting period.
The State Trust Management Company (STMC) managed by
Vnesheconombank (VEB) is a very large holder of government
debt and manages the funded pension liabilities of the
populace. Under current regulations, the STMC has two
portfolios: the state pension fund and a second, broadened
portfolio available for those individuals who opt out of the
public scheme. The state pension fund may hold government
bonds and state-guaranteed corporate bonds and has an
investment return target of yields above inflation. The broader
portfolio may also invest in bank deposits in roubles and
foreign currencies, mortgage bonds and bond of international
organisations.
Mandatory pension provisions apply to all people born after 1967.
As of 2012, the employer is required to pay 22% of the employee
salary into the Pension Fund of Russia, up to a maximum annual
salary of RUB 510 000
(USD 15 454). Of the 22%, 16% is used to fund current pensions
and 6% is allocated to a separate savings account which has a
number of options attached:
• For people who do not opt out of the state scheme, the savings
will be managed by VEB
• Those opting out of the state scheme may nominate a nonstate pension fund, which will then delegate the assets to one
or more asset managers. This area is growing rapidly in terms
of assets and is highly competitive.
For professional investors
11 - Russian fixed income and money market
Schematic of the Russian pension system
Employers
Employees
Voluntary pension payments
Mandatory pension payments
PFR
VEB
16%
Insurance
part
or
d
is
us
ed
Private AM
6%
Pension
savings
Tr
a
ck
re
c
NPF
Pension
reserves
Pension
savings
Current
pensioners
Future
pensioners
Source: TKB BNP Paribas IP, 2012
As of end-March 2012, the VEB portfolios held government,
corporate bonds and mortgage bonds as well as bank deposits.
New inflows into VEB reached an all-time-high of RUB 537 billion
in 2011 (USD 16.3 billion), more than 160% and 450% higher than
in 2010 and 2009 respectively, and show the strong effects of
recent laws on mandatory pension savings.
Russian pension savings are expected to rise from 3% of GDP in
2011 to 8% within the next decade, an increase of around USD 260
billion in assets, creating a substantial pool of asset buyers from
domestic capital markets. Russia plans net OFZ issuance of around
USD 50 billion annually until at least 2014, more than doubling
the size of the market.
Limits on state pension fund holdings
Limit
Actual
RUB bn
50% (min)
72%
531.4
Regional bonds
10%
1%
7.4
Corporate bonds
40%
12%
88.6
Mortgage bonds
20%
2%
14.8
International financial institutions bonds
20%
2%
14.8
Deposits
20%
11%
81.2
State bonds
As of 31 December 2010
Source: Pension Fund of Russian Federation
For professional investors
12 - Russian fixed income and money market
Today, international investors hold only 6%-10% of outstanding
Russian bonds. Despite the lack of capital controls, this level is
much lower than in other emerging countries (e.g. 11% in Brazil
and over 40% in Hungary).
One of the main factors that limit foreign investor participation
is that they can buy local government bonds only through a
Russian broker and using a Russian depositary. Many investors
have been deterred by cumbersome rules requiring accounts with
local brokerages as well as lengthy settlement procedures and
outdated custody laws.
For example, OFZs are traded on the MICEX-RTS exchange, where
only Russian participants with a depositary license have direct
access. In Russia, only the National Settlements Depositary (NSD)
is authorised to provide a depositary service and settlement of
OFZs. This has been an operational barrier to entry for many
offshore market participants since they need to open a deposit
account with the NSD and enter into agreements with Russian
brokers. This infrastructure is incompatible with common
offshore practice to settle transactions in different local markets
through a single account opened with one of the international
depositary and clearing centres.
In January 2012, Russia began to remove the monopoly in
OFZ trading from the local MICEX exchange. It agreed with
Clearstream to settle OFZs in the middle of the year. Another
major clearing system, Euroclear, is expected to begin OFZ
settlements in the third quarter of 2012 after the Centralised
Securities Depository law comes into force on 1 July 2012. The
law will recognise investors rather than local custodians as the
owners of OFZs, opening the market to international investors.
After Clearstream and Euroclear start operating in Russia, we
expect good international demand for OFZs due to the relatively
high 8% yields on 10-year bonds, more than twice the yield
on the equivalent dollar-denominated Russian eurobonds. A
weakness to be addressed remains the lack of adequate hedging
instruments.
For professional investors
13 - Russian fixed income and money market
Annex 1
Russia’s credit quality
On a purely quantitative basis, the Russian sovereign credit rating
would be A or A- rather than the current BBB. Russia can boast a
combination of factors that should contribute to it delivering one
of the strongest economic performances of all emerging market
countries over the next few years.
The ratio of Russian government debt to GDP is currently
around 9.6% and Russia is a net international creditor. Since the
dissolution of the Soviet Union, GDP per capita has grown more
than 20-fold in USD terms and wages have risen more than 35fold. In 2011, inflation was 6.1%, the lowest since 1991.
1992
(year after
dissolution of
the USSR)
1999
(year after
sovereign default
in 1998)
2011
GDP (USD bn)
86
196
1 885
GDP per capita (USD)
575
1 346
13 236
Average monthly wage (USD)
22
64
801
Annual inflation (%)
2 509
36.5
6.1
FDI vs. GDP (%)
1.35
1.69
2.9*
Unemployment (%)
5.3
13.5
6.1
Several qualitative factors maintain pressure for the rating to
remain at BBB in the near to medium term:
• Fiscal performance depends highly on oil and gas prices
• Relative inefficiency of state administration and judicial system
• High concentration of state-owned banks, with the lack of
transparency offsetting high levels of capitalisation and return
on equity.
Relative to other countries, low government debt sets Russia
apart from most developed and emerging countries: currently,
external public sector debt is about USD 35.6 billion and accounts
for less than 10% of GDP, while in most developed economies, the
debt-to-GDP ratio exceeds 80%.
Gross government debt as % of GDP
Country
2005
2006
2007
2008
2009
2010
2011
Brazil
69.2
66.7
65.2
63.5
66.9
65.2
66.2
China
17.6
16.2
19.6
17.0
17.7
33.5
25.8
Mexico
39.8
38.3
37.8
43.1
44.6
42.9
43.8
Turkey
52.7
46.5
39.9
40.0
46.1
42.2
39.4
Russia
14.2
9.0
8.5
7.9
11.0
11.7
9.6
Source: IMF, 2012
For professional investors
14 - Russian fixed income and money market
Gross government
debt to % GDP in
2012
Reserves as % of
gross government
debt
Economic growth
prospects
GDP per capita (USD)
Russia (BBB)
8.4%
301.5%
4.0%
14 246
China (AA-)
22.0%
183.8%
8.2%
5 899
Brazil (BBB)
65.1%
22.4%
3.0%
12 465
India (BBB-)
67.6%
28.8%
6.9%
1 455
South Africa (BBB+)
40.0%
29.9%
2.7%
8 202
Indonesia (BB+)
23.2%
63.2%
6.1%
3 797
Turkey (BB)
36.0%
32.6%
2.3%
10 914
Chile (A+)
10.1%
150.9%
4.3%
15 453
Poland (A-)
55.7%
39.7%
2.6%
14 039
Average (A- to A+)
41.2%
144.0%
2.7%
17 937
Average (BBB- to BBB+)
44.3%
72.4%
3.6%
13 127
Country
Source: IMF, BNP Paribas, Bloomberg, TKB BNP Paribas IP, June 2012
Yield, %
Russian sovereign eurobonds provide a 100bp yield premium over similarly rated Brazilian or Mexican eurobonds
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1
2
3
4
5
6
7
8
9
10
15
20
25
China (AA-/Aa3/A+)
USA (AA+/Aaa/AAA)
Mexico (BBB/Baa1/BBB)
Brazil (BBB/Baa2/BBB-)
Germany (AAA/Aaa/AAA)
Russia (BBB/Baa1/BBB)
30 Years
Source: Bloomberg, TKB BNP Paribas IP, March 2012
For professional investors
15 - Russian fixed income and money market
Annex 2
Top Russian issuers of bonds
Alrosa (Ba2/BB-/BB-), the world’s largest diamond producer,
holds about one third of global diamond reserves and supplies
25% of the world’s rough diamonds. Its mining operations are
mainly in Russia’s Republic of Sakha (Yakutiya), with a minor
joint venture in Angola. Being state-owned, Alrosa enjoys strong
government support, which helped it sustain high production
volumes even during the recent economic crisis. Boosted by rising
diamond prices, its net profit increased 2.3-fold in FY 2011. The
focus on long-term contracts for diamond sales provides a solid
basis for stable future demand. As a part of an ambitious 20092018 strategy, Alrosa has been gradually disposing of non-core
assets and modernising its main production facilities. An IPO
set for 2013 is viewed as a good source of financing for these
ventures. Meanwhile, the company continues to finance projects
through debt capital, having placed another short-term euro
commercial paper issue in March 2012.
Gazprom (Baa1/BBB/BBB), the world’s largest extractor of gas,
owns 23% of proven global gas reserves and accounts for 15%
of total gas production, delivering the output via its own gas
transmission system, which is the largest in the world. The EU
gets about 25% of its gas from Gazprom. The company is engaged
in oil production through its subsidiary Gazprom Neft, as well
as electricity and heat generation through recently acquired
companies. The liberalisation of the domestic market is expected
to result in increase in Gazprom’s domestic tariffs by an average
15% a year over the next three years, which will be a key driver of
Gazprom’s profits. In the past, Gazprom’s debt was mostly driven
by acquisitions rather than organic growth and its financial
leverage was one of the lowest among global industry peers,
at 1.48. Overall, Gazprom is seen as one of the best proxies for
Russian sovereign exposure on the bond market.
Vimpelcom (Ba3/BB/-) is an integrated telecommunications
group, the third largest in Russia and among the top ten mobile
phone operators in the world, with more than 209 million
subscribers. Its main shareholders are Telenor, a Norwegian
telecom conglomerate, and Alfa Group, one of the largest
privately-owned investment groups in Russia. The business is
divided into five geographic units: i) Europe, ii) North America,
iii) Russia, Ukraine and the CIS, iv) Africa and v) Asia. The main
sources of revenue are Russia (39%) and Italy (31%, through
acquired subsidiary Wind Telecom). In recent years, Vimpelcom
has been actively engaged in M&A deals across a number of
emerging markets, albeit with varying success; costs associated
with rapid development of the network have led to substantial
capital borrowings. The company recently said it will abstain from
further acquisitions at this stage and will focus on increasing its
profitability and optimising its business processes.
Bashneft (Ba2/-/BB) is a leading Russian oil & gas producer
and the domestic oil-industry leader in production growth and
refining depth. Bashneft ranks eighth in Russia by oil production
levels, but has a much larger refining business than other
vertically-integrated companies relative to its size. The company
provides inputs to the refineries, using its own and purchased oil,
and sells the oil products that the refineries produce. Bashneft
owns the most modern refineries in Russia and is considered one
of the fastest-growing oil companies in the world (3-year CGR
of 58%). Its strong market position and excellent asset quality
make it an attractive investment, with several international oil
producers having expressed interest in acquiring a stake. The
development of the Trebs and Titov oil fields, in a joint venture
with Lukoil, is the project of the largest strategic importance:
its proven reserves constitute 50% of the total of Bashneft’s
and should have a substantial impact on the company’s future
production rates.
Federal Grid Company (Baa/BBB/-), a government-controlled
power transmission company serving the Unified National
Power Grid, is ranked first in the world among the public power
grid companies in terms of the length of transmission lines
(over 124 000 km) and transformer capacity (322 thousand
MVA). Most of its revenue comes from tariffs for electricity
transmission controlled by the Federal Tariff Service. Its primary
activity is to transmit electricity through backbone grid lines to
distribution grids which, in turn, provide power to end-users
(main customers are regional distribution companies and large
industrial enterprises). FGC holds a monopolistic position and,
being strategically important to the Russian government, can
assume state support in the case of financial distress. Its largescale investment programme and large liquidity reserves are
likely to lead to increased debt in the medium term.
Russian Railways (RZD) (Baa1/BBB/BBB), a state-run monopoly,
is one of the largest transportation companies in the world. It
owns and operates the world’s third-longest rail system (about
85 000 km) and one of the largest railway infrastructures. It is
ranked third globally by cargo and fourth by passenger turnover.
RZD is also one of the largest employers in the country with a
headcount of over a million people. With total assets of about
RUB 2.9 trillion, it is ranked second among Russian companies;
its contribution to GDP is estimated at about 2.5%. RZD is a
regulated entity and its tariffs are usually revised annually by
the government. Its subsidiaries and private operators are not
subject to tariff regulation. The government supports it through
subsidies, injections of capital and capex co-financing, resulting
in financial stability and predictable cash flows.
NLMK Group (Baa3/BBB-/BBB-) is one of the largest and most
efficient vertically-integrated steel producers in the world, with a
production capacity of more than 15 million tonnes. The company
produces a wide range of metal products, mainly at its mills in
Lipetsk, Russia, 350 km from one of the largest iron ore mines in
the world. The proximity of the production facilities to the mines
means the company can save on transportation costs, giving it
a competitive edge in supplying European and Asian markets.
NLMK’s product distribution is highly diversified across a range
of markets with deliveries to more than 70 countries worldwide.
For professional investors
16 - Russian fixed income and money market
Russian Agricultural Bank (RSHB) (Baa1/-/BBB), 100% stateowned, acts as a government agent in providing financial services
to the agricultural sector and rural population. The bank has a
similar business model to Vnesheconombank (VEB), where the
primary purpose is to support the Russian economy with credit
facilities and project financing. Although RSHB’s non-profit
operations are not formally stipulated (as is the case with VEB),
the bank’s main purpose is to support the agricultural sector
rather than to maximise profits. Strong ratios of capitalisation
and liquidity are maintained by steady capital injections from
the state. RSHB has a broad network of 78 regional branches
and more than 1 500 additional offices covering the Russian
Federation. It holds second place by regional branch network in
the country and is ranked fourth among Russian banks in terms
of net assets.
VTB Bank (Baa1/BBB/BBB) and its subsidiaries offer a wide
range of services in Russia, the CIS, western Europe, Asia and
Africa. Within Russia, VTB has three major business lines: VTB
Bank (corporate banking), Bank VTB 24 (retail banking) and VTB
Capital Holding (investment banking). Its network consists of
957 outlets in Russia, the CIS and Europe. As of the end of 2011,
VTB was ranked the second largest financial group in Russia
after Sberbank.
Sberbank (Baa1/-/BBB) is the largest credit institution in Russia
and the CIS, accounting for 27% of aggregate Russian banking
assets and 28% of banking capital. In 2011 Sberbank was ranked
20th among the world’s strongest banks. It has the largest
countrywide branch network of regional head offices and more
than 19 200 retail outlets with about 241 000 employees.
Bank for Development and Foreign Economic Affairs
(Vnesheconombank) (Baa1/BBB/BBB) receives funding directly
from the state budget and is used by the Russian government
to support and develop the Russian economy and to manage
Russian state debt and pension fund assets. VEB is not a bank
in the formal sense, since i) it does not operate under a banking
licence; ii) it is not required to comply with the CBR regulations;
and iii) it is not allowed to take deposits. VEB is by a special law
that stipulates that its operations should be mostly non-profit.
During 2008-2009, the government used VEB as the key vehicle
for injecting funds into various parts of the economy. It was also
actively involved in the rehabilitation of two failed Russian banks
and bought one of the troubled Ukrainian banks.
within its system passing through Russian territory. Transneft
holds a monopoly position in Russia, supplying hydrocarbons to
both domestic and export locations. In 2011, it transported 471.7
million tonnes of oil and 29.3 million tonnes of oil products, or
about 90% and 50% capacity utilisation respectively. Its system
includes 50 142 km of pipelines pumping oil and 18 746 km
pumping oil products. The company is now undertaking a major
expansion project, linking fields in Western/Eastern Siberia to
the Pacific Ocean through the Eastern Siberia-Pacific Ocean
pipeline (ESPO). ESPO-1, going to Skovorodino on the Chinese
border, is already up and running. ESPO-2 will complete the line
between Skovorodino and Kozmino on the Pacific Coast. Other
important projects include BPS-2, an extension of the bypass that
diverts crude from the route through Belarus, instead sending it
to Promorsk; Purpe-Samotlor, a de-bottlenecking connector in
West Siberia and Zapolyarnoe-Purpe, a line to a new region for
the oil industry.
LUKOIL (Baa2/BBB-/BBB-) is a Russia’s largest privately-owned
integrated oil and gas company, with around 0.8% of global oil
reserves and 2.2% of global oil production (16.6% of domestic oil
production and 17.7% of oil refining). LUKOIL is implementing
oil & gas exploration and production projects in 12 countries. Its
main resource base and oil production region is Western Siberia,
which accounted for 44% of proved hydrocarbon reserves and
49% of LUKOIL’s hydrocarbon production in 2011. LUKOIL owns
significant oil refining capacity in Russia and abroad. At home,
it owns large refineries in Perm, Volgograd, Ukhta and Nizhny
Novgorod. It also has refineries in Ukraine, Bulgaria and Romania
and a 60% stake in the ISAB refining complex in Sicily as well as
45% in the Dutch TRN refinery. LUKOIL has significant trading
operations through Litasco, its trading company. More than half
of its revenues come from international sales of oil products, with
profitability diluted by low refining margins in Europe.
Severstal (Ba1/BB/BB-) is one of the world’s leading verticallyintegrated steel and mining companies with key assets in
Russia, the US and Europe. With annual crude steel output of
15 million tonnes, it is ranked second among Russian steel
companies. In 2009-2010, it divested and deconsolidated its
European business, Lucchini, and restructured its North American
business, concentrating on profitable operations. The effect was
the deconsolidation of some USD 1.5 billion of debt as well as
impressive gains in profitability and deleveraging.
TNK-BP (Baa2/BBB-/BBB-) is a leading Russian oil company
ranked among the top-ten privately-owned oil companies in the
world in terms of crude oil production. It is vertically integrated
with a diversified upstream and downstream portfolio in Russia
and Ukraine. Its upstream operations are located primarily in
West Siberia (Khanty-Mansiysk and Yamalo-Nenets Autonomous
Districts, Tyumen Region), East Siberia (Irkutsk Region) and
Volga-Urals (Orenburg Region). In 2011, it produced an average
1.99 thousand barrels of oil equivalent per day (excluding its 50%
share in Slavneft).
Transneft (Baa1/BBB/-) owns and operates the world’s largest
crude oil and oil products pipeline system. It is responsible for all
trunk pipelines in the country and for managing the government’s
stake in the Caspian Pipeline Consortium, the only route not
For professional investors
17 - Russian fixed income and money market
Other available research papers:
Russian oil sector taxation: federal budget wealth or oil sector health? (December 2011)
Russia onwards and upwards: strong consumption growth continues (May 2011)
NEW RUSSIA-CHINA AXIS? Irreversible Synergies Emerging… (January 2011)
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For further information on Russian investment opportunities offered by TKB BNP Paribas Investment Partners:
Tanya Landwehr
Egor Kiselev
Managing Director, Investment specialist,
TKB BNP Paribas Investment PartnersTKB BNP Paribas Investment Partners
[email protected]@tkb-bnpparibasip.com
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