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Raiffeisenbank of Russia analyst report: «It’s too early to bet on any increase in the non-resident share of the federal bond market»

Recent news that non-residents can now trade in federal bonds through the Clearstream clearing house was interpreted by the mass media and certain market participants as a complete removal of all infrastructure barriers for non-residents with all positive consequences for the federal bond market (spread compression).

In fact, since the beginning of 2012 nothing has changed in the local market infrastructure except that non-residents are now able to conduct over-the-counter transactions in federal bonds, i.e. only the requirement to open a brokerage account in Russia was removed. Now, as well as in the beginning of the year, foreign investors may trade in federal bonds either through a custody account with a local depositary holding a nominee account with NSD or through their own account in a foreign jurisdiction, e.g. Clearstream or any other global depositary. A principal difference between those two alternatives is that a non-resident purchasing federal bonds through Clearstream, in terms of Russian law, does not acquire ownership rights to the bonds. Therefore, in the case of any unfavourable developments (delays in coupon payments, default, restructuring, etc.) all ownership rights will rest exclusively with Clearstream. It’s also worth noting that according to Russian law, Clearstream is the owner of all client securities, and in the case of any legal proceedings or restructuring it will need to have a common position on these matters while the approach of its many clients may be entirely different. This factor prevents a wide range of investors from accepting such an investment approach.

On the other hand, trading in federal bonds through a local custody account (e.g. with a subsidiary of a foreign bank) involves a number of technical problems as compared with Clearstream, which allows trading in nearly all instruments through the same account. The result is that the Russian federal bond market remains closed to a wide range of foreign investors, lagging well behind other developing markets (Brazil, Mexico).

It is expected that in the summer foreign depositaries will be allowed to open nominee accounts in Russia that will enable them to offer custody and clearing services in Russian securities to their numerous clients. Accordingly, foreign investors will be able to trade in Russian federal bonds through international clearing houses (such as Euroclear and Clearstream) without having to open accounts in Russia and will bear no risks related to the enforcement of ownership rights. These changes will lead to a considerable expansion in the range of foreign investors active on the federal bond market from the current 3-4% to the level of developing markets (e.g. in Brazil foreign investors account for 11% of the market). This will result in tightening spreads between returns on federal bonds and returns on ruble Eurobonds. Now, the federal bond discount is 70 bp due to, among other things, infrastructure restrictions. This discount will not disappear completely because of different jurisdictions that have a considerable effect on the value of limits (an issue under English law is more favourable compared to the Russian jurisdiction). We think it’s too early to invest in long federal bonds in the expectation that infrastructure barriers will be removed.

ZAO Raiffeisenbank is a subsidiary of Raiffeisen Bank International AG. Raiffeisenbank ranks 10th among the Russian banks in terms of assets, based on 2011 results (Interfax-CEA). According to the same Interfax-CEA data, ZAO Raiffeisenbank ranked 5th in terms of private deposits and 8th with regard to consumer lending.

Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate and investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE, RBI operates an extensive network of subsidiary banks, leasing companies and a range of other specialised financial service providers in 17 markets. RBI is the only Austrian bank with a presence in both the world’s financial centres and in Asia, the group’s further geographical area of focus. Around 60,000 employees service about 13.7 million customers through around 2,900 business outlets, the great majority of which are located in CEE. Raiffeisen Bank International is a fully-consolidated subsidiary of Raiffeisen Zentralbank Oesterreich AG (RZB). RZB indirectly owns around 78.5 per cent of the common stock, the remainder is in free float. RBI’s shares are listed on the Vienna Stock Exchange. RZB is the central institution of the Austrian Raiffeisen Banking Group, the country’s largest banking group, and serves as the group head office of the entire RZB Group, including RBI.


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