Capital Flight to Double as Lowest Yields Spur Foreign M&A: Russia Credit.


Capital flight from Russia is climbing as companies use record-low borrowing costs to fund the most overseas acquisitions in two years, diversifying abroad as domestic economic growth lags behind other emerging markets.

Russian companies have announced $27 billion of foreign purchases this quarter, the most since the third quarter of 2008 and triple the amount in the last three-month period, data compiled by Bloomberg show. The cost for companies to borrow in rubles is the lowest on record at an average 8.9 percent a year in October from 9.7 percent in the previous month, according to data from the central bank published on Nov. 18.

The increase in overseas investment and repayment of foreign-currency debt drove Bank Rossii to more than double its projection for 2010 capital outflows last week to $22 billion from $8.7 billion. Foreign investors put less money into Russia- focused mutual funds in the past six months than any of the other so-called BRIC nations -- Brazil, India and China -- as investors favored more expensive shares in faster-growing economies, EPFR Global data show.

“Acquisition of foreign assets by companies are having a big impact on these outflows,” Yaroslav Lissovolik, chief economist in Moscow at Deutsche Bank AG, said in a phone interview on Nov. 18. “We’ve seen recent acquisitions in the telecoms sector and elsewhere and some of these flows are ending up outside Russia.”

Fifty-two percent of Russian companies are seeking funding to finance international mergers and acquisitions, according to a poll of 100 M&A practitioners by Moscow law firm Goltsblat BLP last month. That’s more than the 42 percent of companies looking to fund capital expenditure.

Sberbank Loan

While purchases of foreign assets increased this quarter, domestic acquisitions fell to $1.6 billion from $6.9 billion in the previous three months and $22 billion in the second quarter, data compiled by Bloomberg show.

OAO Sberbank, Russia’s biggest lender, hired 14 foreign banks to arrange a $2 billion syndicated loan to meet client demand for the U.S. currency on Nov. 16. The loan is the largest of its kind for a Russian bank, the Moscow-based bank said in a statement. Sberbank also raised $140.5 million in five-year bilateral term loans arranged by WestLB AG the same day.

“As financial markets have stabilized, companies have started to complete deals they’ve delayed during the course of two years,” Andrey Golikov, head of treasury and financial markets at Sberbank, said by e-mail on Nov. 19. “We expect to see increased demand for credit resources, including those in foreign currency, until the end of the first quarter.”

Vimpelcom, BP

VimpelCom Ltd., Russia’s second-largest mobile-phone operator, agreed last month to merge its phone assets with Egyptian billionaire Naguib Sawiris to create the world’s fifth- largest mobile-phone company in a transaction valued at about $6.5 billion. VimpelCom is raising a $4 billion bridge loan to fund its bid, Reuters reported on Nov. 5.

Russian oil venture TNK-BP agreed to buy assets in Venezuela and Vietnam from BP Plc for $1.8 billion on Oct. 18. OAO Rosneft, Russia’s largest oil producer, is considering acquisitions of retail assets in Germany and other European countries and plans to close a $1.6 billion deal to buy Petroleos de Venezuela SA’s 50 percent stake in German refiner Ruhr Oel in the first quarter of next year, Chief Executive Officer Eduard Khudainatov said in Warsaw on Oct. 29.

“One of the most important factors of such negative dynamic for outflows was certainly demand from the corporate sector to finance purchases of domestic assets from foreign holders, acquisition of international assets and maturing foreign debt,” said Pavel Gurin, chief executive officer of ZAO Raiffeisenbank, the Russian unit of the Austrian lender that operates in 17 former communist countries.

Maturing Debt

Russian banks and companies have about $16 billion in foreign debt including interest rate payments coming due next month, double the $8 billion in October and November, central bank data show.

The extra yield investors demand to hold Russian government debt rather than U.S. Treasuries rose 1 basis point to 208 on Nov. 19, according to JPMorgan Chase & Co.’s EMBI+ indexes. The so-called spread compares with 146 for debt of similarly-rated Mexico and 177 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The yield spread on Russian bonds is 38 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was unchanged at 141.5 basis points on Nov. 19, according to data provider CMA. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Federal Bonds

Russia credit-default swaps are 12.5 basis points more expensive than contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s. Turkey was 40 basis points above Russia on April 20.

Russia’s federal ruble bonds, or OFZs, declined, with the yield on notes due 2016 adding 2 basis points on Nov. 19 to 7.35 percent. Government dollar bonds due 2020 were unchanged, leaving the yield at 4.716 percent.

The ruble depreciated 0.4 percent to 31.1055 per dollar on Nov. 19, dropping for the sixth day out of seven. Non- deliverable forwards, or NDFs, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble at rate at 31.3350 per dollar in three months.

Real Sector

Russia’s central bank expects fourth-quarter capital outflows to reach $7 billion this quarter, First Deputy Chairman Alexei Ulyukayev said in Moscow on Nov. 18. That would be the second biggest total for the last three months of the year since 2001, data compiled by Bloomberg show.

The government earlier this year predicted net inflows for the first time since 2007. Raiffeisen estimates that capital flight this year through the middle of November reached about $21 billion, said Gurin. Nordea Bank AB, the Nordic region’s biggest lender, said in a Nov. 17 report that the number has already approached Bank Rossii’s full-year estimate of $22 billion.

“It’s not debt repayments, but rather Russian resident investments abroad, not sufficiently outweighed by similar inward portfolio or direct investments in Russia -- which have been driving the capital outflow recently,” Aurelija Augulyte, a Russia economist at Nordea, said in the report.

Russian foreign direct investment plunged an annual 17.8 percent to $8.2 billion in the first nine months of the year, while overall foreign investment, including credits and flows into the securities markets, slipped 13 percent from a year earlier, the Moscow-based Federal Statistics Service said on Nov. 19. Finance Minister Alexei Kudrin predicted on Oct. 5 that foreign direct investment will rise to $40 billion this year.

“We still don’t know how to attract investors into the real sector,” Bella Zlatkis, a deputy chief executive officer at Sberbank, said in an interview on Nov. 17.

By Paul Abelsky and Jason Corcoran 

Contact details


If you would like to receive our legal alerts and updates highlighting current legal issues relevant to your areas of interest and providing expert commentary by our lawyers, please click on "Sign Up" and fill out the form.