Conditions and expectations for non-residents in the Russian debt market

A return to pre-crisis borrowing conditions and wider use of national currencies create favorable conditions for non-residents in the Russian market

Historically, the Russian capital market has not been very popular among foreign countries as a source for obtaining debt capital. According to the Bank of Russia, the debt obligations of non-residents as of the end of July 2022 amounted to RUB 237 bln, or around 0.3% of Russia’s domestic debt market.

However, ACRA assumes that due to a number of circumstances, the presence of non-residents in the Russian market will grow. These include expanding the use of soft national currencies in cross-border transactions, the launch of direct trading of currency pairs (national currencies of different countries and the Russian ruble), stabilization of the Russian debt market, and borrowing conditions returning to their pre-crisis state. The Russian market has all the infrastructure necessary to accommodate non-residents, and the presence of sovereign issues of individual countries in Russian rubles is an important feature for non-resident companies.

Using national currencies

Growth of transactions in national currencies naturally contributes to the most active attraction of capital in national markets, as it leads to lower currency risks. In 2021, the share of the Russian ruble in the foreign trade turnover of the Eurasian Economic Union (EAEU) reached 71.5%, while in Russia’s total exports and imports it reached 14.1% and 27.9%, respectively (see Table 1). This means that the Russian ruble is the most widely used currency for borrowing in the EAEU. In addition, the expansion of economic cooperation with Turkey and the use of national currencies in mutual settlements broadens the geography of use of the Russian ruble, including as a potential currency for borrowing to reduce currency risks.

Source: Eurasian Economic Commission

The Moscow Exchange is adding to the number of foreign currencies that are directly traded for the Russian ruble in order to create direct market pricing between national currencies. The Chinese yuan, Turkish lira, Belarusian ruble, Kazakhstani tenge, Armenian dram, and South African Rand are already traded for the Russian ruble on the Moscow Stock Exchange. On September 12, 2022, trading of the Uzbek som – Russian ruble currency pair will begin, and plans are in place to launch trading for United Arab Emirates dirhams. The structure of Russia’s foreign trade with these countries is listed in Table 2. If non-residents borrow Russian rubles, the existence of a direct foreign exchange market of national currencies will help reduce their foreign exchange risks.

Table 2. A third of Russia’s trade turnover is accounted for by countries whose currencies are admitted to the Moscow Stock Exchange

Source: Federal Customs Service of Russia

Borrowing terms are improving

To reduce financial sustainability risks, the Bank of Russia decreased its key rate to 8.0% in July this year, which is lower than at the end of 2021 (8.5%). This decrease drove demand in the debt market as well. For example, the yield on 3-year Federal Loan Bonds (OFZs) declined to 8.5%, which is comparable to the level seen in late 2021 (see Fig. 1). Therefore, one may talk about a recovery of financing terms for borrowers. As a result of this recovery, the volume of public offerings increased — in July 2022, it amounted to about RUB 200 bln versus near-zero values in H1 2022 (see Fig. 2). Yields on RUB-denominated bonds of non-residents, for example, government bonds of the Republic of Belarus due in 2025, also declined and reached levels below 10%, while the spread to OFZs narrowed from 600 bps in spring 2022 to 120 bps in late August this year. According to ACRA’s projections, the key rate will continue to decline by 1–2 pps or to 6–7% by late 2023, which will be positive for a further increase in the volume of raised capital.

Figure 1. Rates have declined to pre-crisis levels…

Source: Cbonds

The Russian market has full-fledged infrastructure, and sovereigns are beginning to use it to borrow rubles

The Russian market’s infrastructure has all the elements needed for non-residents: the Bank of Russia as a financial mega-regulator, Moscow and Saint Petersburg Exchanges, National Settlement Depository, National Clearing Center, various types of investors, and a liquid market of sovereign securities of various types form a full-fledged internal capital market.

A natural first step for companies toward entering a foreign capital market is to issue sovereign bonds, which creates a benchmark for national companies. Good examples include the Republic of Belarus (bond issue RU000A100D89) and the Republic of Kazakhstan (bond issues RU000A101RP4, RU000A101RT6, RU000A101RV2, RU000A101RW0, RU000A101RZ3, RU000A101S08, and RU000A101S16) who have successfully placed RUB-denominated sovereign bonds.

The continuing economic integration between the Russian Federation and the Republic of Belarus makes the Russian capital market the main source of external market borrowings for the latter. In August 2022, the Ministry of Finance of the Republic of Belarus registered five RUB-denominated Eurobonds with the National Settlement Depository. In May 2021, the President of the Republic of Belarus issued a decree allowing for government borrowings of up to RUB 100 bln for refinancing external debt. The potential issuance of these securities will facilitate borrowings in Russian rubles for Belarussian companies by creating a much-needed yield benchmark.

The development of the capital market in the national currencies of Russia’s sovereign trading partners will expand trade relations, promote the direct pricing of currencies and, as a result, push down foreign exchange risks and capital costs in the medium and long terms.