The expectation that Euroclear Bank and Clearstream will join the list of clearing agents for Russia's bond market could give foreign investors cheaper and easier access to the $50bn pool, but they will find a market one local participant says still lacks liquidity.
The expectation that Euroclear Bank and Clearstream will join the list of clearing agents for Russia’s bond market could give foreign investors cheaper and easier access to the $50bn pool, but they will find a market one local participant says still lacks liquidity.
Presently, all bond trades must go through a Russian depository, which adds up to 3 or 4 basis points per transaction, according to some estimates.
Accessing the market through recognized global custodians will mean investors no longer need pay fees to local registrars.
Understandably, Russian securities brokers have not been overly supportive of the initiative, as they stand to lose a great deal of business.
Local fund managers eagerly await the reform, however, and identify it as the most important development on Russia’s market at the moment.
Its timing is not entirely clear.
The Russian Federal Financial Markets Service (FFMS) published the official proposal on June 28, suggesting initially granting foreign clearing houses access to state and municipal debt and debt from foreign investors until July 2014. Corporate debt may be included after this date.
Market players expect that broader clearing will begin by the end of the year.
But Evgeny Gavrilenkov (pictured), Troika Dialog’s chief economist, says: “By the time Euroclear begins working, many other circumstances will have emerged that can hardly be forecasted.”
The Kremlin and local fund management industry are keen to attract foreign capital to the market, which now gets most its inflows from locals and suffers from a general lack of foreign investment.
Vladimir Tsuprov, CIO of TKB BNP Paribas, says the market has become much more stable, especially as the local pension system has developed, “but there is still not enough liquidity”.
Coupled with the introduction of the Federal Law on the Central Securities Depository (CSD) in Russia, expected soon, the opening up the of bond market should make trading more transparent for foreign investors.
“Portfolio investors, as opposed to strategic investors, will particularly benefit from this,” says Laura Brank, head of Russia practice for law firm Dechert LLP. She has already seen much interest from clients.
Passive investors who do not get actively involved in the investment process cannot quickly react to the risks traditionally associated with investing in Russian bonds.
Last week, Russian Railways issued an inflation bond linked to the consumer price index. This is the first time the firm has issued a bond of this type. Although the inflation rate has dropped from 8.46% last year to 3.6% in May, it remains a major concern for the economy, and investment vehicles offering protection from inflation risk are welcome on the market.