EMTA SPECIAL SEMINAR:
RUSSIA/UKRAINE: AN UPDATE
Thursday, March 26, 2015
Hosted by
Skadden, Arps, Slate, Meagher & Flom LLP
40 Bank Street, Canary Wharf
London, E14 5DS
Recent events involving Russia and Ukraine present a unique challenge to Emerging Markets investors. This EMTA Special Seminar will provide an update and will cover the Russian economics outlook, liquidity, oil pricing, the ratings downgrade and sanctions, as well as address the prospects for Ukraine following its recent IMF Agreement.
3:15 p.m. Registration
3:30 p.m. – 5:00 p.m. Panel Discussion
Andreas Kolbe (Barclays) – Moderator
Stanislav Gelfer (BlueBay Asset Management)
Anna Shamina (JP Morgan Asset Management)
Kaan Nazli (Neuberger Berman)
Jamie Boucher (Skadden, Arps, Slate, Meagher & Flom LLP)
Cocktails will be served at 5:00 p.m.
Support provided by Barclays and Skadden, Arps.
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.
EMTA Russia/Ukraine Panel Debate Effects of Sanctions, Oil Pricing, Ratings and Ruble Depreciation
EMTA organized a Special Seminar on the Russia/Ukraine situation on Thursday, March 26, 2015. A crowd of 125 market participants attended the event at Skadden Arps’ office in the Canary Wharf section of London. Barclays provided additional support for the event.
Andreas Kolbe (Barclays) moderated the discussion, and introductory remarks posited significant liquidity cushions, with current valuations on Russian fixed income products being “generous.” He noted that the coming year would be a challenge, with most economists forecasting a 4% contraction in Russian GDP in 2015.
Kolbe polled investors for the possibility of a positive catalyst emerging to bolster Russia’s fortunes in the near-and medium- terms, but neither Stan Gelfer (BlueBay Investment Management) nor Anna Shamina (JPMorgan Asset Management) expected any dramatic improvements. “In the near-term, oil will be the driver, fundamentally,” argued Shamina who noted that the ruble’s flexible exchange rate would mitigate some of damage in the Russian economy, although she didn’t see depreciation as a panacea. Kaan Nazli (Neuberger Berman) stressed the importance of market technicals, such a strong local bank bid in Russia, which he saw as supporting Russian credits.
Jamie Boucher (Skadden Arps), the panel’s legal expert, provided her assessment of current EU and US sanctions on Russia. She was more hopeful back in February that discussions would lead to progress, but that hasn’t materialized. With the US and EU extending sanctions and leaders swearing there could be no roll-backs until all terms of the Minsk II Agreement were met, it was unlikely that sanctions will be diminished in the near-term. As a representative of many financial institutions that have been caught in the crosshairs, she emphasized that “in an era of $9 billion penalties being imposed on banks for violating other sanctions, the risk tolerance by institutions is not low… it’s negative.” The uncertainty of the future direction of sanctions not only fostered very low risk appetites, it also translated into increasing efforts by clients to analyze sanctions, “so it’s not just business as usual…sanctions are having significant impacts.”
Investor panelists expressed skepticism whether Russian officials would make progress in diversifying from their oil dependency even though a weak ruble could facilitate the promotion of other sectors. In Gelfer’s assessment, the Ministry of Finance was trying to make the case for diversification, having learned from past crises. “Falling wages will open up room for investment, but real wages rise quickly in Russia,” he stated.
Shamina admitted that she wanted to be optimistic about diversifying the economy; “it won’t be quick or massive; but any small amount of change is progress.” The ban on some food imports might give a boost to local food production, in her view. Nazli added that defense procurement would also be a robust sector in the current environment.”
On potential spiral of future sanctions and triggers, Boucher noted the move by some US Congress members to adopt greater sanctions against Russia, although she personally saw unilateral US sanctions as less effective than a broader, multilateral approach. Boucher believed that the US administration would continue to focus on state-owned entities, and that the energy, financial and defense sectors had been most affected to date. However, if pressure were to be increased, Russian equities or reducing the tenor of permitted debt issuance could be future policy steps. She opined that greater, sectoral sanctions were difficult because of the size of Russia’s economy and tend to have enough “grey in them” to be subject to interpretive risk, especially since they’ve never been implemented before.
With Kolbe observing that sanctions and reputational risk were “holding some investors back,” speakers reviewed the role of sanctions in affecting their investment decisions. “They have become an issue for every legal and compliance department; more questions are being asked about Russian exposure and the thought that the West couldn’t hurt Russia with sanctions was no longer prevalent,” affirmed Nazli, who added that any escalation to ban Russian corporate financing for under 30 days could have a huge impact. Gelfer’s firm had increased disclosure to clients to address any concerns, and commented that he saw the possibility of sanctions being strengthened was decreasing, and, in any event, sanctions didn’t seem to be affecting pricing as much as one would expect. Shamina argued that it was difficult to predict the “when and what” of sanctions changes, so as a portfolio manager her time was better spent on focusing on liquidity and fundamentals.
On credit ratings, Shamina stated that the sovereign downgrade to a sub-investment grade rating “makes my job easier; the worry about a downgrade is off the table.” Gelfer was now seeing increased European high-yield interest in Russia, although Russia being cut from industry indices “would be a different story,” and significant capital controls would “matter more.”In Nazli’s view, any Russian corporates that could avoid a downgrade were in a relatively good position.
Turning to Ukraine, Gelfer voiced optimism on the current IMF support program. “It is much better than the first time around, and the technocractic side of the government is more impressive in the Central Bank, Ministry of Finance and judicial branches than even six months ago,” he declared. Gelfer judged the current program would suffice for Ukraine to return to sound financial footing, provided that the “situation in the eastern part of the country is frozen.” Nazli expressed reservations on the political commitment to the program in Kiev, pondered whether a Greek-like movement of goal posts would occur and posited that “desperate times need desperate measures.” Shamina viewed the proposed debt operation as “ambitious and one big IF” and underscored that the Ministry had been adamant there was no back-up plan. Although it insisted that failure was not an option, the Minister would have a “struggle convincing investors.”
In Boucher’s view, a frozen conflict would not be enough to end sanctions. “Both the EU and the US have been clear that nothing is being rolled back until the Minsk II Agreement is implemented,” she observed; they are the “tool of choice and an alternative to sending troops and providing weapons,” which have greater consequences. On the question of whether investor’s perspectives would change if US sanctions became more stringent than the EU’s, Boucher remarked that big global banks have made commitments to adhere to the US sanctions laws, even if they were not technically obligated as non-US banks. Nazli speculated whether a Cyprus-like EU solution were possible, with one regime being applied to an occupied part of a country and a different one applied to the non-occupied area; although, he quickly added that Moscow would not welcome such a development.
Russian participation in Ukraine’s debt restructuring was important, in Shamina’s view, but more so was the acceptance of the terms by the Ukraine’s other creditors; “that is the first priority,” she declared. She found it unlikely for Ukraine to join the EU in the near- to medium-term future. Nazli viewed geopolitical ambitions as much more important to Russia than its $3 billion repayment prospects.
The panel also provided opinions on whether Ukraine would meet its IMF deadline. Gelfer was optimistic that a deal could be concluded in time, and believed that current pricing reflected likely exit yields. Shamina and Nazli considered the timing “challenging,” with Shamina seeing upside only if bond prices fell an additional 5-6 points to have upside potential.
All views expressed were those of the panelists, not their organizations.
EMTA previously hosted events addressing the Russia/Ukraine situation in New York on June 23, 2014 and February 11, 2015.