EMTA SPECIAL SEMINAR:
RUSSIA/UKRAINE: AN UPDATE
Wednesday, February 11, 2015
EMTA
360 Madison Avenue, 17th Floor
(on 45th St. between Madison and 5th Aves.)
New York City
Recent events involving Russia and Ukraine present a unique challenge to policymakers and to Emerging Markets investors. This EMTA Special Seminar will provide a timely update and will cover the Russian ratings downgrade and how that will affect the markets, recession, oil and sanctions, as well as the Ukraine situation.
12:00 p.m. Registration
12:15 p.m. – 2:15 p.m. Panel Discussion
Yury Tulinov (Rosbank Russia) – Moderator
Christopher Tackney (Greylock Capital Management)
Dmitri Petrov (Nomura International plc)
Alexander Kudrin (Sberbank CIB)
Jamie Boucher (Skadden, Arps, Slate, Meagher & Flom LLP)
Lunch will be provided
Support provided by Nomura, Sberbank CIB, Skadden, Arps and Societe Generale.
This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA’s Legal & Compliance Seminars*.
*CLE credit will be available for NY attorneys. This seminar is non-transitional and appropriate for experienced attorneys only. Please click here for details on EMTA’s Financial Hardship Policy.
Registration fee for EMTA Members US$95 / US$695 for non-members.
We regret that this event is not open to the media.
Russia and Ukraine Seminars Highlight Challenges Ahead to Regain Investor Confidence
Recent events involving Russia and Ukraine present a unique challenge to policymakers and to Emerging Markets investors. The EMTA Special Seminar held on February 11, 2015 at EMTA’s offices in NYC provided a timely update and covered the Russian economics outlook, liquidity, oil pricing and the ratings downgrade and sanctions, as well as the Ukraine situation.
A similar panel, moderated by Andreas Kolbe (Barclays), with the following panelists -– Stanislav Gelfer (BlueBay Asset Management), Neil MacKenzie (BlueCrest Capital Management), Anna Shamina (JP Morgan Asset Management), Kaan Nazli (Neuberger Berman) and Jamie Boucher (Skadden, Arps, Slate, Meagher & Flom LLP) -– will be held on March 26, 2015 in Skadden Arps’ London office, will also address the prospects for Ukraine following its recent IMF Agreement.
In the first panel in NYC, Yury Tulinov (Rosbank Russia), as the moderator, provided a summary of the elements of the perfect storm that has led to the current situation in Russia - low oil prices, virtually closed capital markets and high domestic interest rates. Recession for 2015 looks almost unavoidable (-3% to -5%). Consumption dynamics are weak, due to rising and steadily high inflation in the last few months (15.6% as of early February 2015) with wages that haven’t caught up and banks tightening the lending standards. Investments will be pressured this year due to a combination of a gloomy and uncertain business climate, collapse of oil prices and uncertainty about the revenues of the domestic government.
Tulinov mentioned that Russia always talks about diversifying when oil is weak, but then all the talk goes away when prices rebound. Further, the government may be just waiting for oil prices to rebound because ultimately it is not enthusiastic about making changes. He predicted that restructuring the economy, while oil prices are dropping and other prices are increasing, will be “very painful”.
Alexander Kudrin (Sberbank CIB) added to the above litany of events the ratings downgrade and its effect on the bond markets (although the potential downgrade has already been priced in). The picture is mixed with a low sovereign debt to GDP ratio (3%), on the one hand, and, on the other hand, a complicated political situation and risk of non-payment assessed as real in select corporate and banking names only (although most of the Eurobonds are highly graded with a solid profile and low default possibility, while Russia remains committed to support its corporates and banks). He felt that the $380 billion in reserves could not possibly save all the corporates and banks, but by looking deeper into the structure of Russia’s external debt one could see that there was probably more money available than expected.
Responding to Tulinov’s questions on the risks and rewards of investing in Russian bonds, Christopher Tackney (Greylock Capital Management) responded that, although market liquidity was not great, the sanctions risk was not the sole driver – the Crimea invasion, downing of a plane, decrease in oil prices and ratings downgrade all contributed to the profound shedding of risk. Regarding the sanctions, he claimed that investors are gun-shy about which assets to invest in since the sanctions are not as directed and more broadly spread.
Real money investors (many of which are not traditional EM investors) are primarily underweight Russia. Barclays Aggregate Index investors have also purged risk in recent episodes. On the flip side, liquidity was so poor that small volumes could move prices. The structural degradation of the market (a large part of which is regulatory), coupled with high volatility, low volume and a low risk budget/tolerance, makes the decision to invest difficult – the valuation call was clear, in Tackney’s view, but he questioned “ is it a value trap, or is it something that an investor can monetize?” Those investors with a long-term perspective and a smaller present capital commitment are likely to do well with this investment opportunity.
Responding to Tulinov’s assertion that “going long” may be the best alternative, Tackney agreed that trading actively now in Russian assets will likely get you “chopped up”; it’s best to stick to high quality names that don’t need access to the foreign debt market in the coming year. A “counter-cyclical trading policy” where one buys when the market sells off and sells if there’s an appreciation may also work well.
Jamie Boucher (Skadden, Arps, Slate, Meagher & Flom) provided some color on the sanctions front, which she categorized as “uncertainty, layered with the current aggressive enforcement environment”. The BNP $9 billion penalty was illustrative of how financial institutions can be hit hard with sanctions risks. “Bank management tolerance for risk is not zero; it is below zero,” she commented. She viewed the OFAC sectoral sanctions as unusual in that policymakers were using sanctions in new ways and treading new ground, thus opening up for interpretation every word in the directives. The US political environment with a President that has two years left in office, a Senate Foreign Relations Committee that is considering even more aggressive legislation (akin to sanctions on Iran and Cuba) and an Administration that owes Congress a report on its strategy in the Ukraine all contribute to the present uncertainties and challenges.
Given the skyrocketing compliance costs (which include a high burden of proof) that banks face while they attempt to navigate the US and EU regulations (which are different, as are the sanctions applications even within the EU countries), it is no wonder that investors may have such a low risk tolerance and many sit on the sidelines.
Dmitri Petrov (Nomura International plc) discussed the macro and bond market implications of a Ukraine restructuring by listing three possible scenarios for the current crisis: (1) a Chechnya scenario, where Ukraine retakes control of its territories and provides fiscal investment into rebuilding the area, (2) a Yugoslavia scenario, where there is further involvement by others as no mutually acceptable government in Kiev is found and (3) a “frozen conflict” scenario, his base case, with uncertain timing.
He posited that most of the adjustments already occurred even if the GDP numbers are not reflective of those adjustments. There will be impacts on inflation, dependent on when the conflict ends, but the economy will stabilize at some point. The short-term scenario includes talks of a restructuring and negotiation with the IMF, while the longer-term scenario includes ongoing conflict. Petrov was more confident on debt re-profiling, given the need to reduce the coupon, but the recent devaluation changed the framework and it’s unclear what investors will demand. The longer-term outlook remains uncertain and this is unlikely to be the last restructuring. He predicted a 1% possibility for full repayment and a 70% possibility of some form of reprofiling. In reality, restructuring with a 25% discount in principal is required to make the debt sustainable and acceptable to investors. Default was also a possibility.
At the Q&A session, Boucher reminded the audience that it was easier to impose sanctions than remove them and that cutting off Russia from SWIFT was a major escalation relating to the stability of its banking system, so the US was likely to use other, less draconian measures.
Tulinov concluded that “the road to restoration of Russia’s investment attractiveness and market confidence is a long one, but hopefully successful if taken in small steps”.