Market Insights en-gb Tue, 21 Aug 2018 23:06:02 GMT 1930 Mixta Africa CFO on Affordable Housing Initiative, High Cost of Funding and Advice for Borrowers With pressure on high-yield assets and non-investment grade credit across EMs, Mixta Africa, an African property developer and fast-rising player in the continent’s real-estate market, is doubling down on its corporate principles – including adaptive product development, low cost land acquisition and establishing local communities – to navigate those challenges. Bonds & Loans speaks with Benson Ajayi, Executive Director and Chief Financial Officer for Mixta Africa about this and more. Benson Ajayi talks strategic initiatives and funding 21 Aug 2018 CEO CFO Insights Market Insights 107 Tue, 21 Aug 2018 09:01:07 GMT Bonds & Loans: Can you give us a sense of the company’s key strategic focus areas over the next 6-12 months?

Benson Ajayi: Mixta Africa’s strategic focus over the next 12 months is on activities aimed at establishing the company as the leading real estate developer in its countries of operations, and also expand operations into identified markets in Africa. Our product focus is Affordable Housing. We have been working with a number of countries and key partners to provide our solutions, and we are optimistic that these shall bear results to strengthen our credentials in social and affordable housing sector over the next year – the recent signing of the Edo State housing project being an endorsement of our capability.

Bonds & Loans: What are the Treasury’s key priorities over that period? What is the biggest constraint or challenge facing the department at the moment?

Benson Ajayi:  Treasury will focus on strengthening and positioning Mixta Africa’s balance sheet to support its growth ambitions. Key focus will be to achieve closure on our fund-raising initiatives and optimize our revenue and cashflow to ensure projects are adequately funded. The high cost of borrowing, particularly in Nigeria is challenging, as is the dearth of funds and funding suitable for real estate.

Bonds & Loans: What are Mixta Africa’s funding plans over the coming months? If you are looking to borrow, what format, size and tenors is the company looking at? And what will the use of proceeds be?

Benson Ajayi: Our fundraising plans include taking on project debt and equity funding to support our business objectives, and the strategic initiatives we currently are pursuing at the group and subsidiary levels. We have an aggregate of 30% debt in our capital structure, mostly in NGN. However, we have plans for the next 6-12 months is to explore the possibility of raising capital at the holding company level. Our current funding mix is skewed towards equity, but our plans involve both equity and new debt for specific purposes.

Bonds & Loans: To what extent is your funding strategy exposed to swings in commodity prices? How does Mixta Africa mitigate that risk, as well as broader FX risks?

Benson Ajayi: Falling commodity prices affect demand for real estate, as we recently witnessed in Nigeria. It could also affect confidence in the financial markets, tightening credit and liquidity. We aim to mitigate this by having multiple funding plans, and diversifying income operations – Mixta is present in multiple countries.

Apart from the general risks described above, Mixta’s core operations do not rely substantially on FX, but some minimal obligations require FX servicing. Mixta generally seeks to minimise exposure to FX risks both during financing and the execution of projects.

Bonds & Loans: What advice would you give to borrowers looking to come to market for the first time?

Benson Ajayi: Prepare adequately. Be aware of the burden and costs, work with quality and trusted advisers, equip yourself with knowledge, and resource adequately in-house. Evaluate the options carefully and prepare, bearing in mind timing considerations. It is important to also ensure that alternative plans are in place.

Bonds & Loans: How are your bonds trading at the moment? And how do you choose your relationship banks, i.e. what are some of the core criteria you use?

Benson Ajayi: Mixta Real Estate’s bond is currently trading at a premium with a yield of about 14.62% - much lower than the coupon on the instrument, demonstrating confidence in the company and the bond.

Banks that are able to demonstrate good understanding and of our business and flexibility in their solutions have worked with us as partners over the years.

Projects Africa
1928 Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead EM FX stabilized last week as the situation in Turkey calmed somewhat. Reports Friday that the US and China are hoping to resolve the trade dispute also helped EM FX ahead of the weekend. However, TRY remains vulnerable as the US threatens more sanctions due to the pastor. Both S&P and Moody’s downgraded it ahead of the weekend and our own ratings model points to further downgrades ahead. Turkish markets are closed this week for holiday. Head of EM Strategy Win Thin on key data drivers this week 20 Aug 2018 Global Market Insights 55 Mon, 20 Aug 2018 12:41:06 GMT Thailand reports Q2 GDP Monday, which is expected to grow 4.4% y/y vs. 4.8% in Q1. CPI rose 1.5% y/y in July, which is still in the bottom half of the 1-4% target range. The Bank of Thailand has signaled that it is in no rush to hike rates. Next policy meeting is September 19, no change is expected then.

Poland reports July industrial and construction output and PPI Monday. July real retail sales will be reported Wednesday, which are expected to rise 7.4% y/y vs. 8.2% in June. Central bank minutes will be released Thursday. Despite rising price pressures, the central bank has maintained its ultra-dovish forward guidance of steady rates through 2019. Next policy meeting is September 5, no change is expected then.

Taiwan reports July export orders Monday, which are expected to rise 2.1% y/y vs. -0.1% in June. It also reports Q2 current account data that day. Exports and export orders have slowed in recent months. July IP will be reported Thursday, which is expected to rise 3.0% y/y vs. 0.4% in June. The central bank does not have an explicit inflation target, and so downside risks to growth should allow it to remain on hold at its next quarterly policy meeting in September.

Chile reports Q2 GDP and current account data Monday.Growth is expected at 5.2% y/y vs. 4.2% in Q1. CPI rose 2.7% y/y in July, which is in the bottom half of the 2-4% target range. However, robust growth has led the bank to signal the likely start of the tightening cycle in Q4. Next policy meeting is September 4, no change is expected then.

Korea reports trade data for the first 20 days of August Tuesday. Export growth has slowed in recent months. CPI rose 1.5% y/y in July, well below the 2% target. Policymakers are concerned about the growth outlook and low price pressures should allow the Bank of Korea to keep rates on hold for now. Next policy meeting is August 31, no change is expected then.

National Bank of Hungary meets Tuesday and is expected to keep policy steady. CPI rose 3.4% y/y in July, the highest since January 2013 and in the top half of the 2-4% target range. Yet the bank has maintained its dovish stance. If the forint resumes weakening, we think the central bank will tilt more hawkish.

South Africa reports July CPI Wednesday, which is expected to rise 5.1% y/y vs. 4.6% in June. If so, this would be the highest reading since September 2017 and moves closer to the top of the 3-6% target range. With rand weakness picking up, we see upside risks to inflation and so SARB will likely have to think about starting a tightening cycle. Next policy meeting is September 20.

Singapore reports July CPI Thursday, which is expected to remain steady at 0.6% y/y. While the MAS does not have an explicit inflation target, low price pressures should allow it to keep policy meeting at its semiannual policy meeting in October. Singapore then reports July IP Friday, which is expected to rise 6.6% y/y vs. 7.4% in June.

Brazil reports mid-August IPCA inflation Thursday, which is expected to rise 4.27% y/y vs. 4.53% in mid-July. The central bank views the recent rise of inflation as temporary, but we disagree, especially in light of renewed BRL weakness. COPOM will likely start a tightening cycle at the next policy meeting September 19.

Mexico reports mid-August CPI Thursday, which is expected to rise 4.76% y/y vs. 4.85% in mid-July. The central bank views the recent rise of inflation as temporary, but we disagree, especially in light of renewed MXN weakness. Banxico will likely resume its tightening cycle in the coming months. Next policy meeting is October 4. It reports Q2 current account data Friday.

Malaysia reports July CPI Friday, which is expected to rise 0.9% y/y vs. 0.8% in June. Q2 growth came in at a much slower than expected 4.5% y/y. While Bank Negara does not have an explicit inflation target, low price pressures should allow it to remain on hold well into 2019. Next policy meeting is September 5, no change is expected then.

Macro Currencies Global
1927 A US-China Trade Dispute May Be Good for Latin America Latin America may have more to gain than lose in a U.S.-China trade dispute, so long as it does not spiral into a recession-provoking trade war, writes John Price. Economist John Price's take on the trade war 17 Aug 2018 Global Market Insights 55 Fri, 17 Aug 2018 08:07:21 GMT China and the U.S. are both the two largest customers and suppliers to Latin America. Punitive tariffs levied by the U.S. against Chinese products—and vice-versa—will create supply gaps that Latin America can suddenly fill. A tax on Chinese and American exporters equates to a subsidy to Latin American exporters. And what company doesn’t appreciate a subsidy, especially when another country is paying for it?

In crude terms, China buys raw materials from South America and sells finished goods across the region. The U.S. buys manufactured goods from the northern half of LatAm and sells agricultural goods back to those same countries (Mexico, Central America and Caribbean) while selling high value goods and services across Latin America.

The problem with trade disputes between nations is that they can end as quickly as they begin, so Latin American exporters should be wary of investing too much in expanded production capacity. Nonetheless, when fate smiles upon you, you jump at the chance. Below is a small sample of the hundreds of products already caught up in or threatened by the U.S.-China trade battle.

Ironically, Mexico would be the biggest winner stemming from trade disruption caused by U.S. tariffs on Chinese products. However, producers there will be wary about expanding investment while the NAFTA negotiations remain in a state of flux.

Medium-Term Opportunity: Rerouting Trade

If Chinese exporters who rely on the U.S. market determine that U.S. tariffs have staying power, then they will look to relocate some of their production to countries with stable free trade agreements established with the U.S. In Latin America, the most obvious candidate is Central America where assembly and logistics costs are reasonable and lead time entry to the U.S. eastern seaboard markets is quick.

Chinese textile and clothing makers already employ thousands of Central Americans but may soon set up shop to assemble other goods facing 25% or higher U.S. tariffs, including: electronics, electrical equipment, HVAC equipment, car parts, light vehicles, etc. Chinese steel producers may choose to buy assets in Brazil and Argentina, both exempt from U.S. steel tariffs. An even longer list of products could be assembled in Mexico but until the NAFTA negotiations are finalized on the issue of product origination percentages, Chinese investors will look elsewhere (Vietnam, South Korea, etc.).

Foreign Direct Investment

China’s economic engagement with Latin America involves at least three goals, each of which will be impacted:

  1. Secure reliable long-term supply of vital commodities to fuel its economy: energy, metals, and food by purchasing production assets around the world, beginning with Latin America. Sour relations with the U.S. will drive Chinese buyers of these assets closer to Latin American companies as well as Canadian mining interests with LatAm assets.
  2. Find middle-income consumers for China’s emerging consumer brands including electronics, automobiles, toys and others. Losing American customers to Asian competitors (Vietnam, Korea, Japan) will push Chinese exporters more aggressively into middle markets like LatAm.
  3. Develop infrastructure projects to occupy China’s vast construction and engineering sector. The slowdown in domestic infrastructure spending in China forced the government to start building across the globe. A slowdown in Chinese manufacturing places added pressure on construction to employ people.

From the U.S. perspective, several industries have their supply chain centered in China where products are assembled, often incorporating parts made in satellite Asian countries (Taiwan, Thailand, South Korea). A 25% tariff (on imports to the U.S.) may not be enough to dislodge these supply chains. However, on the periphery are dozens of products whose assembly could be profitably shifted to Mexico. If NAFTA talks (or a bilateral agreement between Mexico and the U.S.) can be penned after the U.S. mid-term elections, and the China trade dispute remains, then U.S. manufacturers will begin moving production assets from China to northern Mexico.

Trade Agreements: The Enemy of My Enemy is My Friend

Though not the result solely of the U.S.-China trade dispute, but rather a function of U.S. nativism and international Trump loathing, unlikely bedfellows are teaming up to reshape world trade agreements. It may take years for this shift to impact Latin America’s economy but these changes, once instituted, will be difficult to reverse.

Mercosur has struggled for more than a decade to ink a trade agreement with the EU. Reactionary politics in both Brazil and Argentina combined with European protectionism kept the agreement from happening. The Europeans may have dodged a bullet in their recent trade dispute with the U.S., but Brussels no longer considers the U.S. to be a reliable economic ally, even if the transatlantic security alliance remains unbent. European exporters want unfettered access to the Brazilian market and may have finally convinced European farmers to accept South American agricultural products, thanks in no small part to the fact that China is buying up everybody’s excess food and beverages.

The U.S. rejection of the TPP did not kill the agreement (though the Canadians kept it in limbo for fear of antagonizing Washington). Today, the awkwardly named CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) is moving forward and has attracted the official interest of new potential signatories including Great Britain, Colombia, Indonesia, South Korea, Taiwan and Thailand. This will be a particularly useful agreement for Mexico, whose manufactured exports need diversifying.

Should the fear and loathing of Washington continue, we may even see a coming together of the Alianza Pacifica and Mercosur. Though political support is present, it will take a lot of work to technically align the import customs procedures of these two trade blocks. Mercosur trade rules are frequently disregarded and onerous to 3rd nations. Furthermore, Mercosur customs unions (except perhaps Uruguay) are riddled with corruption. Alianza Pacifica countries have been forced by their U.S., Canadian and other trade partners to adopt modern customs clearing procedures with far less corruption. They are more competitive economies than Mercosur members. Bridging these two trading groups will take at least 3-4 years but could happen if Trump is re-elected in 2020 and the U.S. congress continues its protectionist streak.

The Chinese word for crisis is often incorrectly interpreted as danger + opportunity. However, this time the linguistic faux pas might be a suitable premonition, particularly if you are an exporter in Mexico or Brazil.

Macro Policy Americas Asia Pacific Global Latin America
1926 Luft Energia CEO Doris Capurro Eyes Multilaterals, ECAs for Argentina Renewables Funding Doris Capurro, President, CEO & Founder, Luft Energia talks to Bonds & Loans about the company’s renewable energy development plans, and its bid to tap into multilateral development institutions and export credit agencies to help finance the next wave of projects in the pipeline. ECAs to support the next wave of projects? 16 Aug 2018 CEO CFO Insights Market Insights 107 Thu, 16 Aug 2018 12:30:50 GMT Bonds & Loans: Can you give us a sense of the company’s key strategic focus areas over the next 6-12 months?

Doris Capurro: Our company is part of an international energy company that develops, builds, owns and operates energy infrastructure businesses in the emerging markets. We are primarily focused on the development of renewable energy solutions, investing in wind, solar and hydro assets. Established in 2016, the company is currently developing a wind power plant in Argentina, which began commercial operations in June 2018.

We have also several other projects in our development pipeline. Our company is sponsored by a U.S.-based private investment firm managing more than USD10bn in assets on behalf of its investors.

The key strategic focus of the company over the coming 6 to 12 months is to find investment opportunities in the Latin America market, with preference for renewable energy technologies, with an adequate risk-return profile. Ideally, this would allow us to expand our energy portfolio.

Bonds & Loans: What are your funding plans over the coming months? If you are looking to borrow, what format, size and tenors is the company looking at? And what will the use of proceeds be?

Doris Capurro: We are working with investors that would like to fund the equity of projects with PPA, preferably on a project finance basis. In that case, they would be looking for a tenor of at least 10 years, with one or two years of grace period, non-recourse, and for a total amount that is at least 70% of the CAPEX of the project.

Bonds & Loans: In the current climate, where do you expect to raise funds? What is the role of international and regional banks – what are your expectations of them?

Doris Capurro: We expect that multilateral institutions, ECAs and development banks increase gradually their presence in Argentina and Latin America, and thus be able to provide reasonable sources of finance for projects with attractive terms and conditions (mostly for PPA projects in USD).

We also expect that regional banks support this process by gradually providing finance in similar terms and promoting projects with reasonable levels of national components.

Bonds & Loans: What is the biggest constraint or challenge facing your treasury department at the moment?

Doris Capurro: As we generate cash flows in USD with our first wind farm in Argentina, and our investors allocate equity only if it meets their IIR targets, we are not facing any constraints at the moment. Having said that, we hope that renewable energy projects revenues to be effectively paid in due time, not generating any treasury constraints for the SPVs owners of the projects.

Did you find this interview interesting? Doris Capurro will be speaking at the Bonds, Loans & Derivatives Argentina. Make sure you join her on the 2nd October 2018 at The Four Seasons Hotel, Buenos Aires. 

Projects Americas Sustainable Finance
1925 Russia Seeks to Mobilize Internal Reserves Amid Dollar Liquidity Shortage The Russian Central Bank tentatively confirmed that the banking sector is experiencing a dollar liquidity deficit. In an apparent push to de-dollarize the economy, it may for now resist from intervening, hoping to encourage more local currency borrowing. But inaction could pile additional pressure on the rouble in coming months. The de-dollarization is in full flow 15 Aug 2018 Russia & CIS Market Insights 57 Wed, 15 Aug 2018 08:35:26 GMT Despite numerous overt advances made by Donald Trump to mend the fractured relationship between Washington and Moscow, Russia continues to feel the heat from the Western sanctions, with additional measures introduced by the EU in July, and a double blow from the US.

First, the State Department announced a new set of sanctions (mostly on chemical and military tech sectors) following the Skripals nerve agent attack in the UK, while a new bill in the Senate has threatened to ban new Russian sovereign debt trades and, potentially, close the US markets off for key Russian state-linked lenders, like VTB and Sberbank.

On top of that, is now forced to face the very immediate threat of global trade wars and waning investor sentiment towards emerging markets.

Confronted with multiple internal threats and uncertainties in global markets, Moscow is retrenching, mobilizing its internal resources both in terms of production (the much touted “import-substitution” initiatives) and funding – by means of reducing the economy’s dependence on the dollar.

Some of the measures have been more direct, and nothing short of extraordinary. The Finance Ministry has sold off the vast majority of its US Treasury holdings in a mere two months, following years of ploughing billions into them – with little regard to market sentiment or bilateral tensions.

The sell off of 84% of USTs held by the MinFin, going from USD96.1bn start of May to a mere USD14.9bn by mid-July, according to the US Treasury report, was by far the biggest percentage sell-off of the US notes in history, and led to the country plummeting out of the list of top-30 UST sovereign holders (China, Japan and the KSA remain atop that list).

Diversification Game

Some of the cash sourced from the sell-off went into other safe assets, such as gold, with Moscow swiftly breaking into the top-5 sovereign gold holders following a five-year monthly buying spree. In June, Russia added a further 500,000 ounces of the precious metal (15.55174 tons) to reserves and bought some 106 tons of gold since the start of the year, with total reserves now approaching 2,000 metric tons, a record for the post-Stalin period.

These drastic moves by the Central Bank and the MinFin have, naturally, aroused speculation about motives. According to the official line, much of the USD went into purchasing Euros, as well as IMF bonds and the yuan. The official statement by the CBR chief Elvira Nabiullina (citing generic global risks and the need to diversify portfolios) did little to quash the rumours. But while the above motives likely played a part, most observers agree that threat of further sanctions also influenced the decision.

“With regards to Russia’s sale of US Treasury bonds, it is likely caused by fear of sanctions and asset freezes, similar to those that happened with Iran’s UST holdings,” said Denis Poryvay, a Raiffeisen Bank analyst. “That’s why they are pulling out of the US jurisdiction and investing into Euros, yen and, of course, gold.”

“The latter has long been a favourite commodity of the CBR. Either way, owning large amounts of an albeit volatile commodity is a better option than having your assets frozen,” he added.

Sanctions risk and possible asset freezes are also the reasons cited by Sergey Aleksashenko, an economist at the Brookings Institute and a former deputy finance minister, who added he doesn’t see much impact of these moves on the banking and financial markets.

Dollar’s What I Need

Other analysts, however, have speculated that the move could be linked to the longer-term goal of de-dollarizing the economy, a notion supported by recent interviews with the Finance Minister Anton Siluanov. He recently conceded that the US currency was “becoming a risky instrument in international settlements” – which is still heavily dependent on the USD and has been hit by capital outflows, leading to hard currency shortages.

Notably, as Bloomberg reported, citing central bank data, its deposits in other central banks, international institutions and foreign lenders jumped by the equivalent of USD47bn in April and May, indirectly supporting the idea of asset diversification.

In a July report the Central Bank indicated that the structural liquidity surplus dropped in June due to some of the major lenders reducing the amount of assets in their deposits while simultaneously increasing their cash deposits at the Central Bank – as well as other factors. Some observers highlighted the significance of this admission by the CBR, which, as a regulator, tends to soften the rhetoric and smooth out the rough edges.

“Indeed, we have recently observed significant tightening of foreign currency liquidity in the Russian banking sector,” said Natalia Yalovskaya, Director at S&P Global Ratings in a note. “There are several likely reasons for that, such as capital outflow, following a new round of sanctions in April this year, as well as sizeable volumes of external debt repayment made in 1Q-2Q2018 by banks and non-bank borrowers.”

“In addition, there is a seasonal summer impact related with vacation season that increases demand for hard currency from the population,” she pointed out.

Aleksashenko, meanwhile, disagrees with the CBR assessment, claiming that the MinFin FX purchases and the OFZ redemptions would have been offset by the rise in oil price during May and June.

“And I disagree with the CBR view on seasonal decline in export proceeds – this factor starts being visible in August,” he noted, adding that outflows by non-residents have indeed been significant and the FX purchases by the Ministry, perhaps, excessive.

Capital Outflows

According to the Central Bank figures, direct foreign investment to Russia fell 2.5 times to USD7.6bn – USD5.6bn in Q1, 10% higher year-on-year, but only USD1.7bn in Q2. Overall the real sector saw USD23.2bn of foreign investments in 2017, dropping by a quarter compared to 2016. Private sector outflows reached USD17.3bn in January-June 2018, compared to USD14.4bn a year earlier.

Russian government bonds also came under pressure in recent months, with the sell-off accelerating and new auctions seeing demand wane. Foreigners’ share in Russian OFZ bonds was at 34.5%, or RUB2.35tn (USD3bn), as of April 1, days before the fresh U.S. sanctions. That share fell to 27.6% as of June 29, according to the Central Bank data cited by Reuters.

Yields on Russian bonds jumped in April after a round sanctions, and again this month, as fresh sanctions were announced. Following the US Treasury’s announcement, Russia’s 2043 issue fell 1.7 cents to 105.25 cents in the dollar according to Tradeweb, the lowest levels seen since June 22. The 2029 Eurobond fell 1.15 cents to 93.14 cents. The average bond yield spread of Russian sovereign bonds over safe haven U.S. Treasuries on the JPMorgan EMBI Global Diversified index rose by 6bp.

The slowdown of late spring and early summer was somewhat offset in a recent debt sale on July 24, when the MinFin sold all of the RUB35.2bn (USD558mn) in OFZs, with non-residents snapping up a third of the fixed-coupon bonds, according to head of the Finance Ministry’s debt department, Konstantin Vyshkovsky, cited by Bloomberg. The recovery was attributed to the passing sanctions scare, when it became apparent the threat of additional US sanctions on Russian local debt was exaggerated.

Still, estimates of hard-currency assets on banks’ balance sheets as far as May already suggested a deficit looming on the horizon, said Poryvay, and hopes of a recovery over the summer were diminished by stronger-than-expected outflows from the banking sector.

“First, we were surprised to see such low balance of the current account, despite the rise in oil price, as well as the amount of funds withdrawn from the banks. The liquidity shortage in June reached USD3bn, according to our estimates. That is the amount needed to bring the basic spreads back to normal levels; at the moment they widened close to levels typically seen in December.”

According to the analyst, June’s outflows were linked to large dividend payments, while in April there were external liabilities to service, but the peak has now passed. The bank’s estimates suggest that the status quo is likely to remain until the end of the summer, at which point new waves of maturities for large corporates, in September and December could mean that the road to recovery would be even more prolonged.

De-dollarizing Risks

In order to boost FX liquidity, the MinFin could introduce regular FX swap sales for major banks, providing dollars for roubles held as collateral. While this would technically be “tapping into the reserves,” some of it could be offset by soaking up the current account surplus through market interventions, which brought in USD30bn into federal reserves last year, upwards from USD14bn a year before.

However, as Poryvay and other observers have pointed out, Nabiullina and other officials’ comments suggest they don’t see the current shortage of FX as a major threat, and are in fact quite satisfied with the high cost of dollar credit, encouraging businesses and consumers to borrow in local currency.

This view is also supported by the move in early August to increase mandatory provisions requirements on retail foreign currency deposits to 7 from 6% from August 1, in addition to increasing risk weights for FX-denominated loans and lifting provisions on corporate FX deposits to 8 from 7%, while requirements on rouble deposits remain unchanged.

“By raising the provisions on banks’ forex deposits the Central Bank is disincentivising lenders from raising their deposit rates, which they could have been lifted in order to compensate for the USD deficits,” Poryvay explained. “That suggests to us that the CBR is comfortable with the current level of deficit.”

“It appears that the CBR wants to encourage people to hold their savings in RUB, thus lowering the share of hard currency assets on banks’ balance sheets. In essence they are pushing Russian companies to borrow in roubles on the local market, and if they still want to borrow in FX, they will have to approach international lenders or their Russian subsidiaries,” the Raiffeisen analyst added.

If viewed through the prism of ongoing de-dollarization of the economy, this move provides some value, and may in fact be quite shrewd if one considers the current global market environment, where USD overleveraging is beginning to weigh on some emerging economies.

“These initiatives aim to decrease the share of hard currency assets, should be supportive to decreasing currency-related risks and positive for the stability of the banking sector in the long run,” Yalovskaya said.

She expects banks and non-bank borrowers to have sufficient hard currency to repay foreign debt that is coming due.

“Since 2014, banks and corporate borrowers have significantly decreased their external borrowing, and therefore the demand for hard currency for the debt repayment in 2018-2019 has been gradually decreasing.”

Several experts noted that, if push comes to shove, the CBR may start doling out dollar loans to banks, while the MinFin could pause the purchasing of USD.

Rouble Trouble

The problem with this approach, however, as Poryvay pointed out, is that sooner or later it will put more pressure on the rouble, which has been fairly steady after a sanctions-related readjustment – from around 58 to over 62 per USD in April.

“At the moment the local currency is quite strong, as it appreciated on the corporate tax payments. But if the dollar shortages continue, RUB will gradually depreciate.” Shortly after the conversation with Poryvay, the rouble indeed fell on the news of new US sanctions, retreating to its lowest since November 2016 overnight and nearing 70. It is currently trading at just over 68 per USD.

The FX risk has also largely closed other sources of dollar funding for firms, both in debt and equity. Russia’s second-biggest mobile operator, recently announced it was delisting from the London Stock Exchange; the number of Russian companies trading in London dropped to 50, from 70 in 2011. Commodity traders like Oleg Deripaska’s EN+ and Polyus Gold have remained on the market – and suffered as a result, with shares plunging every time a new round of sanctions, or even a hint of one, is announced.

Similarly, several sources told Bonds & Loans about attempts by Russian corporates to issue Eurobonds over the past 6 months, scrapped for reasons varying from poor market backdrop to high pricing and low demand.

With the corporate sector now faced with over USD34bn worth of foreign debt payments in the second half of 2018, according to the Central Bank, with net payments of USD12.6bn scheduled to Q3, followed by USD21.7bn in Q4, FX liquidity is becoming hard to come by, particularly for those companies who have most of their revenues in roubles.

Government to the Rescue?

One factor that could exacerbate both problems is recent legislation that was passed to provide some protection to Russian state-linked corporates that are either under – or facing the threat of – Western sanctions.

In order to support the sanctioned corporates, the government has scrapped the requirement for large companies to repatriate their dollar revenues. There are also discussions about creating Delaware-style “tax-haven” territories across the country, which would allow corporates and individuals to repatriate their capital without significant losses, and even perform transactions in foreign currencies and securities without restrictions; these initiatives, admittedly, have been opposed by the Central Bank.

But a more sinister “solution” was floated in the early days of August by president Putin’s economic advisor Andrey Belousov, who has proposed a USD7.5bn tax hike for Russian mining, chemical and fertilizer companies – as they are paying lower taxes than the oil and gas sector – providing an additional RUB500bn (USD7.5bn) in tax revenues.

The plan, which was leaked via an anonymous social media account, has been likened to the expropriations of the post-Soviet years and condemned by some of the major business leaders in the country.

Meanwhile, as a Raiffeisen bank report indicated, the HQLA in June was lower than the FX current account surplus (by around USD2.8bn) for the first time in 6 years, resulting in the hard currency deficit in the banking sector. This makes it increasingly harder to compensate for the systematic shortages created by the corporate sector liabilities, which will only get worse with the removal of capital repatriation laws for exporters.

“The banks still have a significant share of Eurobonds (around USD51bn) on their balance sheets, but would struggle to offload them in a short time span without significant discounts (particularly corporate bonds which are fairly illiquid),” the authors noted.

For now, as Aleksashenko noted, Russian corporates are well enough positioned to deal with upcoming maturities and dividend payments. “And the current account is very strong, so with a free-floating rouble it is not a problem for anyone having roubles to purchase FX.”

But without truly committing to economic diversification and carrying out deeper, structural reforms, the government risks isolating the economy and cutting off the remaining channels of external funding before it is able to establish an alternative source and mobilize a sufficiently ample internal reserve.

Macro Currencies Policy Russia & CIS