The crisis has come at a time when the government has steadily opened up the country’s capital markets to foreign investment. The Russian bond market, which historically has in the near past offered better yields compared to Europe and the United States, is now completely open to foreign investment dollars. Following the introduction of simpler procedures for bond trading via the Euroclear and Clearstream depositories, foreign investors now have direct access to the domestic Russian bond market.
January was a busy month for Russia’s National Securities Depositary (NSD), with agreements signed with global post trade leading lights Euroclear and Clearstream covering cross border services for Russian cor- porate and municipal bonds. The NSD is setting a blistering pace of change, though currently the initiatives are outstripping investor interest in the Russian market.
As of the end of January this year investor clients of Euroclear and Clearstream can buy Russian corporate and municipal bonds without having to set up Russian subsidiaries or opening special accounts with Russian banks. Until the agreements came into force foreign investors only had indirect access to the Russian bond market. For example, Clearstream allowed its customers to buy Russian bonds using a Deutsche Bank subsidiary in Russia as an intermediary.
Both Euroclear Bank and Clearstream have now opened accounts with Russia’s central securities depository (NSD), allowing all Euroclear Bank and Clearstream clients investing in Russian corporate and municipal debt to settle those trades and deposit their positions with either Euroclear Bank or via Clearstream’s ‘Bridge’ arrangement. The agreement will facilitate the settling of transactions between accounts at the various CSDs and help increase liquidity flow in the Russian market. “Following on from the success of our OFZ service, we ... now offer services for municipal and corporate assets. The growing appetite shown by investors to mitigate risks while ensuring a solid return on their diverse portfolio of assets is now further enhanced with access to many of Russia’s companies,” explains Frederic Hannequart, chairman of Euroclear Bank.
The new service complements the NSD’s separate and existing agreements with Clearstream and Euroclear Bank that were finalised in February of last year in support of Russian government bonds (OFZs). Municipal bonds and corporate bonds issued in 2012 and later are eligible for the service. Euroclear Bank’s service for OFZs (and now corporate and municipal debt) is part of a progressive suite of services which aims to expand Euro- clear Bank clients’ access to Russian securities, including a service for Russian equities which is scheduled to go live in the second half of 2014.
OFZs, corporate and municipal securities held in safekeeping by Euroclear Bank will also be eligible as securities collateral for securitised transactions where Euroclear Bank is the tri-party collateral management agent.
The introduction of settlement for corporate Russian bonds, coupled with a firm commitment to establish the Bridge between the ICSDs in the Russian market will help further develop the market infrastructure needed to offer investors and issuers an enhanced offering in the Russian capital market. Prior to the crisis, the share of foreign investment in OFZ government bonds has gone up by circa 25%, according to the Bank of Russia, since the establishment of new financial market infrastructure in Moscow.
As a next step, Clearstream will look to offer settlement for equities via its direct link to the NSD, due for summer 2014, in line with expected changes to Russian legislation. This looks likely to continue despite current market strains.
All parties and politicians are aware of what is at stake: the pace and depth of Russia’s rising investment market. Just how important international links are to the overall process are stressed by finance minister Anton Siluanov, who explains that:“significant changes have been introduced to Russian [financial market] legislation, and in particular to the Tax Code, to the Securities Market Law, and the Law on Joint Stock Companies. I am confident that this is an important step towards establishing an International Financial Centre (IFC) in Moscow that aims at providing better accessibility and lower cost of long-term financing for Russian companies.”
Certainly, this level of market deepening is a pre-requisite for the Russian market. As a result of the changes, international investors’ share of the Russian corporate bonds market could triple to 10% over the next two or three years, an increase of $10bn to $15bn in absolute terms, adds Siluanov.