Call us on
+44 (0) 207 045 0920

Russia & CIS

Russian Bonds Remain Resilient on Corruption-Related Events

Russia’s Economy Minister has been accused of demanding a US$2mn bribe from Rosneft to facilitate the privatisation of another state oil company, Bashneft, in what is building up to be one of the highest-profile corruption cases in modern Russian history. Despite this, investors are unlikely to be put off Russian assets due to their recent strong performance.

Nov 15, 2016 // 2:55PM

Russia’s Economy Minister Alexei Ulyukayev has been accused of receiving an illegal payment of US$2m from a case linked to a US$5bn acquisition by state oil giant Rosneft. Ulyukayev is the highest-ranking Russian official to be detained while in office since the collapse of the Soviet Union in 1991.

According to the official statement by Russia’s Investigative Committee, Rosneft alerted the authorities about the minister’s ‘illegal demands’ for approving a ‘legitimate takeover’.

Later on Tuesday Kremlin spokesman Dmitry Peskov announced that Putin had "published a decree relieving Ulyukayev of his functions", adding that the president had "lost confidence" in the minister, who is now under house arrest.

“This is an unprecedented event, even in the wider Russia experience of corruption-related arrests of top officials, especially in recent years. It is difficult to say who was the ultimate initiator or beneficiary in the case,” said a senior banker.

The source speculated that the charge could be either an example of the crackdown on corruption, or, potentially, part of the ongoing struggle between the secret service-aligned and government ‘liberals’ camps.

As news of the surprise arrest spread, some began to question the legitimacy of the privatisation deal, but Rosneft and VTB bank, which was overseeing the takeover, were quick to issue statements denying that there was any risk to the purchase.

"The deal was done with huge premium to the market. We do not see any risks to the deal, that is absolutely correct," Rosneft spokesman Mikhail Leontyev told the press. Shortly after that announcement, Rosneft confirmed that it made an offer in a mandatory buyout.

 In October Rosneft, the partially-owned oil giant, paid RUB330bn (US$5bn) for a 50% stake of Bashneft, itself one of Russia's largest state oil companies.

“With nearly a month until the Rosneft deal deadline, we think there could well have been an internal confrontation in the government over possible scenarios involving Rosneft’s role,” the banker noted. “With this move, it seems Rosneft could have cleared its way to winning the case, as the noise around the privatisation deal might distract potential strategic buyers of Rosneft.”

While local observers agree that the graft case is unlikely to affect the Bashneft purchase, there are some doubts that the privatisation of Rosneft itself, initially expected to commence shortly, will take place on schedule.

The state is seeking to raise about RUB700bn (US$11bn) from the sale of Rosneft’s 19.5% stake. According to government sources quote by Reuters, the deal could see Rosneftegaz, the state holding company that controls Russian oil majors Rosneft and Gazprom, help Rosneft finance the buyback of some of its shares in itself.

On Tuesday afternoon Rosneft announced it has offered RUB3,706.41 ($56.74) per share for a mandatory buyout of Bashneft’s minority shareholders. As of Tuesday morning Bashneft shares traded at RUB3,528 per share, up 1.4% on the day. The company’s shares have further rallied this year, seeing a 37% increase on the plans for partial privatisation.

“If the [Ulyukayev] story is indeed only about Rosneft privatisation-related uncertainty, we also see no major market implication as investors appear to have already discounted the negatives of the process and the damage to an already-depressed investment climate is not crucial,” noted the banker, adding that the mid-to-long-term effects look more unclear at this stage.

Similarly, Sergey Dergachev, senior portfolio manager of EM debt at Union Investment Privatfonds GmbH, does not expect to see any monumental shifts stemming from the surprise arrest.

“Ulyukaev´s arrest is an important event, but is not an event that materially affects Russian asset prices and their outlook going forward,” Dergachev said. “They will be affected more by global factors, including continued geopolitical frictions with the US (which could ease as Trump takes over as US president) as well as Russia’s strive to regain investment-grade rating.”

While it remains to be seen how the markets react to Ulyukayev’s arrest and potential implications for the takeover deal, so far this week Russia stood out as one of the better EM performers, buoyed by Donald Trump’s election win – the candidate was perceived as Russia-friendly by many analysts.

Notably however, the rouble did not entirely escape the EM currencies sell-off, but its 3.6% drop against the US dollar since Wednesday compares favourably with Mexican peso’s 13.6% and South African rand’s 8% drop. Meanwhile, Russian 10-year sovereign bonds were still falling on Tuesday to 8.95%.

“On a micro-level, looking at the sovereign´s balance sheet as well as corporate balance sheets of most Eurobond issuers, they are very strong compared to other EMs, with relatively low indebtedness, limited RUB risk to their credit profiles and moderate refinancing schedule,” claimed Dergachev.

“From my point of view, actually, nothing has changed since yesterday´s event,” he added.

Russia & CIS Macro

Bonds & Loans is a trusted provider of news, analysis, and commentary that helps illuminate the most significant issues, events and trends impacting the global emerging credit markets.

Recommended Stories