Sanctions overs the conflict in Ukraine have closed off western capital markets to some Russian companies, giving Asia an opportunity to take a greater role. But an easy ride in the east is not guaranteed.
Russia’s embrace of international capital markets since the end of the Cold War has at times been hard to believe. A country previously pitted so aggressively against capitalism has seen companies across its economy venture out into the world for stock listings, bond deals and acquisitions, signaling its enthusiasm for redblooded dealmaking.
Western capitals such as London and New York have profited handsomely from the Russian gold rush, providing the investment banking infrastructure needed to raise funds and give advice to rapidly growing companies from the former communist state.
The latest sanctions package from the European Union came at the end of July and restricted Russia’s access to the bloc’s capital markets. The measures prevent EU nationals and companies from buying or selling 'new bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued by major state-owned Russian banks, development banks, their subsidiaries outside the EU and those acting on their behalf’. The US Treasury imposed sanctions alongside that 'prohibit US persons from providing new financing to three major Russian financial institutions, limiting their access to US capital markets’.
This sudden frost has prompted renewed interest in Asia. The Russian government has signaled its intention to boost ties with Asian markets, while Russian corporates are already putting out feelers to source new funds in the region. The initial knee-jerk pivot to the east could well result in some short-term deals being signed, but there is also a more fundamental question of which direction Russia will turn in the longer term. The longer the sanctions regime lasts and the wider it spreads, the more need there will be for Russian companies to do business away from their usual stomping grounds.
"I think there’s a structural shift going on towards Asian capital markets," says one senior banker in a large Russian state-controlled bank.
"There is a natural move towards Asia, but secondly, these new sanctions are driving Russia and Asia together."
The length of time the sanctions regime will stay in place is hard to predict, but some believe it would be wise for those affected to plan for the long haul. "If we look at other sanctions regimes, the average one lasts for about seven years," the banker continues. "It would be prudent for Russian companies and the government to plan for them not being removed in the short term. It’s highly likely we will see a continued escalation of links between Asian providers of capital and Russian companies. What traditionally happens is you get loans and strategic investments first, and that is followed over time by bonds and equity. The Russian government is starting to open the doors by doing deals with Asia. I think there’s a very strong… connection between Russia and Singapore. Hong Kong is also likely to be an area of focus."
In the short term, a Russian pivot towards Asian markets is more likely to result in new loans for corporates and the ultilization of private banking services by high net-worth individuals; once the dust has settled, minds might turn to how much business exists in M&A, ECM and DCM in the region. The ability of Russian companies to do deals across the board in future is likely to be a truer test of how interconnected they will become with the Asian capital markets landscape.
But the recent escalation of the conflict in Ukraine and the resulting sanctions that have flowed from it have now driven a large wedge between Russian companies and the western capital markets that have partnered them in their rise. The restrictions have curtailed the ability of western banks to deal with certain Russian companies while also casting serious doubt onto the wisdom of doing business with nonsanctioned Russian entities.
One business area that could see an uptick in business involving Russian firms is mergers and acquisitions. Russian companies have expanded all over the world, with cash-rich natural resources firms and manufacturing companies in particular scouring the globe for potential buys to fuel growth. This has turned previously locally focused companies in industries such as oil and steel into global players.
But this expansion has often taken place outside of Asia. Deals have been done across a range of industries, increasing the global footprints of a variety of Russian firms, but now some believe eyes will turn away from western markets towards the possibilities that lie in the East, especially the lucrative Chinese market.
Moscow-based lawyer Anton Sitnikov, partner and head of corporate M&A at Goltsblat BLP, has observed the growing interest in Asia from Russian companies, but believes the trend is still in its infancy.“During the last five or six years or so, there has been more interest from Russian companies towards Asian markets than before,” he tells Euromoney. “It started to appear on our radar that clients were looking to the east.
Companies involved in TMT and IT are doing some deals in Asia. Asia still remains an undeveloped market for Russian companies.”
The energy sector remains a key one for the Russian economy and this is arguably where Russia can gain the most attention when discussing deals abroad. Some of Asia’s largest and most energy-hungry economies are keen to secure supplies and might well be more open to Russian acquisitions as part of the bargain. The conflict in Ukraine might quicken the pace of Asian expansion for companies in the oil and gas sectors.
“After the political tensions started to appear, it also resulted in some energy prospects,” continues Sitnikov, “but I think they are still in the early stages, even though they are pushing outwardly in this direction. The energy deals are mainly looking to China, with major Russian state-owned enterprises discussing transactions at a high level. India is also a country where energy deals could be done by Russian companies.
Sitnikovadds: “I think we may conclude that the M&A market is a difficult one these days. The European market is still currently favoured by Russian buyers, and I don’t think this will change in the short term, but there will be a strong mix of Asian and European deals in the future. It would be difficult to say how the Russian government can encourage private companies to buy in a particular jurisdiction, but the state would prefer if there was a strong mix of deals between western markets and Asia.”
If Russian companies are expecting some kind of preferential treatment in Asia, they are unlikely to find it. Competition for good assets in the regions’ markets is fierce; Russian companies will need to understand that in order to succeed. Some bankers believe although buys could happen, Russian companies would still have to work hard to secure assets and might also face some reputational issues.
“I’m not sure Russia has that much advantage in Asia because of political ties,” says one senior banker based in Hong Kong. “The Chinese have been very focused on ‘best price wins’. They are going to be competing, and I don’t think they have any special advantage. It would not besomething we would pitch for. It’s not like it’s an open door here. Russia is not a client people in Asia want to deal with. Maybe some of the frontier markets have thicker skin, but they are attractive to Chinese private equity too.”
This need to compete with Asia’s powerhouse economies could well be one of the biggest stumbling blocks to Russian companies carrying out a wave of dealmaking in the region. Companies from big economies such as China and India are unlikely to give Russian companies an easy ride in looking for good assets in the region. Russia still has strong links with some countries in Asia from Soviet times, and these might help, but it seems likely a strong business case would need to accompany any proposals.
The second area that could see an increase in business from Russia is in equity capital markets. Russian companies have long considered Asia listings, with both Hong Kong and Singapore often touted as destinations for IPOs. Aluminium producer Rusal listed its shares on the Hong Kong Stock Exchange a few years ago and was followed to Asia this year by energy giant Gazprom, which carried out an introductory listing of global depositary receipts on the Singapore Exchange.
But generally, the rumoured listings of Russian companies have failed to materialize in Asia. Bankers have grown weary of waiting for a wave of
Russian IPOs such as the one that hit London. But that might change if primary equity markets in the west narrow for Russian companies.
“Russian companies considering listing are looking at Asia,” says a senior ECM banker at one of the top Russian banks. “The new fashion is for the Singapore Stock Exchange. Getting a listing in Singapore is the easiest solution in the Asian stock exchange universe. Singapore is quite a sophisticated place and they know Russia well. It’s much more sophisticated in Russian equity products. It would be logical for oil and gas companies to look at Asia.”
The banker also comments that for government-owned companies, it could be a political rather than a business decision. But not yet. “I think serious capital raisings are not going to happen anytime soon,” the banker continues. “It’s more about: ‘Let’s postpone our listing plans and see what happens in the future.’ I don’t think Asian markets are a replacement for western listings. Investors are not as educated. It’s not a mature market yet. I think it’s a kind of waiting game from the issuer side at this stage.”
Author: Rob Hartley
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