Troika Dialog Moscow Forum: Risk Management
In the fifth blog in a series from the Troika Dialog Investment Forum in Moscow, panelists considered Russia’s commodity sector.
Panelists representing the primary producers and manufacturers of the ‘real economy’ described their companies’ approach toward managing various types of risk.
Most speakers employ a selective range of simple derivative instruments (such as plain vanilla currency swaps), mainly in order to synthetically adjust standalone large-ticket deals on the liability side.
Examples included such deals as Gazprom’s 2008 placement of a Eurobond with a coupon linked to the oil price (the company believes that it has saved circa 70 bps per annum in interest costs over the four years since the issue versus a straight issue) and the synthetic conversion of local ruble bonds into foreign currency liability (a practice widely employed by many Russian local bond issuers in 2009-11).
On the revenue side, most companies rely on ‘natural hedges’ and commercial methods to reduce cash flow volatility, such as long-term contracting. An exception, noted by UC RUSAL, was that being one of the world’s largest exporters of aluminum, it very actively employs exchange-traded commodity derivatives to manage its sales mix.
The major reasons for the rather selective and cautious use of derivative financial instruments by Russian industrials seem to be their complexity (all panelists were strongly in favor of simple structured products), and very strong loss aversion of the companies’ risk officers and treasurers (“You are not rewarded if your hedge works, but if it loses, it is your fault.”),
There was also a shared belief that Russian commodity producers have certain natural hedges (weaker oil means a weaker ruble and lower cost base) and the simple absence of tradable derivative contracts for many commodities (e.g. for uranium). Industrialists use foreign banks mainly as counterparties for structured transactions, since large Russian institutions entered the field only recently.
None of the industrialists mentioned counterparty risk as a component they pay attention to in a structured deal. All agreed that Russian commodity-exporters use of structured financial instruments for risk management represents a very interesting market for large banks, and the market is likely to grow materially in the coming years.