Tuesday, 25 September 2018

Mother Russia – generous land

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Even after the collapse of the Soviet Union, Russia remains the world’s largest country stretching from Kaliningrad on the Baltic shores to Petropavlovsk-Kamchatski on the Bering Sea. With each region generous with a natural resource – be it Karelian gas, Yakutian diamonds or Siberian oil – Russia has much to offer. Bakyt Azimkanov reports.

Just as Russia’s landscapes vary, its regions differ in the economic sense. Each republic, land, region or town has various means of raising funds through different financial instruments. Their dissimilar capital markets activity leaves a gap between the developed and the developing regions. Sub-federals and municipals – regions in other words – can no longer raise funds externally – except to refinance existing debt.

Russia is the world’s largest producer of oil, despite not holding the largest reserve. It has the largest natural gas supply and controls over 70% of the world’s palladium. With its dominant position in these and numerous other commodities it is in a position to challenge the dollar’s dominance. Russian credits are already starting to ask for payments in roubles.

The Federal budget has two to three levels – state, regional and, in some cases, municipal – while some regions are forming their own investment budgets. There are more than 80 subjects of the Federation with varying levels of capital markets sophistication. Some run a budget deficit while others boast a surplus; some even heavily depend on the federal backup. Bonds remain the most widely used financial instrument among regional issuers.

“Regions are growing rapidly so is GDP per capita,” said Felix Evtushenkov, president of Sistema Hals, a development company. Due to booming real estate prices, regions and property developers are tapping the debt markets more than ever before. And although Muscovite financials and corporates account for more than 80% of capital markets exercises in the local market, regions outside the capital are increasing their activities.

The Chechen Republic has more than thousand oil wells. Rosneft is already there developing processing plants and war-torn infrastructure is being brought back to life. During the Soviet times the Chechen aviation fuel used to supply Aeroflot. The real estate in Chechnya might pick up in three years via the state programmes, according to Evtushenkov.

Russia’s Caucasus has been considered problematic but no more. “We were a bit surprised when all bonds of Kabardino-Balkaria were significantly oversubscribed in 2006,” said Alexey Porkhun, head of investment banking at Rosbank, “and investors asked when we will bring others, like Chechnya, to the market.”

Far away but not far behind

Russia’s Far East and Siberia are catching up with Central Russia and the Urals. Khabarovsk Region has already raised funds through the rouble market as well as the City of Magadan and the Far Eastern Transport Group in the pipeline. As the shadow economy becomes more transparent in all regions, more regional issuers are likely to come to the market. Dalsvyaz, a communications provider operating in the federal district while controlling 87% of the fixed-line telephones in the region, is among prominent Far Eastern issuers.

Big-name taxpayers mean added revenue. Chukotka’s governor, Roman Abramovich, pays the tax for all Chukchi, negating the need to access the capital markets for the gold and coal-rich region.

Diamonds are not only a girl’s best friend, but the Sakha (Yakutia) Republic’s too. A Yakutian diamond company, Alrosa, was one of the pioneers among corporates in Russia to access the rouble market, while the Republic itself has also raised funds through debt instruments.

Further west, the Altai Land is developing its tourism industry and transport systems with the Baikal Lake attracting more visitors each year. Irkutsk Region is one of the active issuers in Siberia, while Krasnoyarsk Land boasts a few well-established names like KrasAir and AiRUnion. Tomsk Region is also proud of its issuance track record in the domestic market, with free economic zones set in Omsk and Tomsk.

TNK-BP is a well-regarded borrower not only in the rouble market but globally, brining more jobs and financing to Tyumen. However, the City of Novosibirsk remains the financial capital of Siberia and is regarded as the Silicon Valley of Russia with all IT industry and science concentrated there. Ursa Bank, one of Russia’s top 20 by assets, is based in Novosibirsk and was one of the first to issue a Eurorouble bond, along with Gazprombank, Locko Bank and others. The Chelyabinsk Pipe Rolling Plant is both active in the bonds and syndicated loans markets, while S7–Siberian Airlines and Sibirtelecom also put the region on the investor map.

Sibur is Russia’s largest petrochemical company, controlling up to 56% of market share in certain products with the rubber making up 40% of its export. It issued largest ever rouble bonds worth a combined Rbs120bn with the company accounting for 40% in the Russian tyre market.

Yeltsin’s Urals and Central Russia

Boris Yeltsin was from the Urals and worked for the benefit of then the Sverdlovsk Region as the Communist Party member. Yekaterinburg remains the capital markets centre of the Urals Federal District and has transformed in the last five years. With most of the petrochemical industrials based in Siberia and Urals, more foreign direct investments are being attracted while conveniences like healthcare, education and housing are being brought to western standards.

Perm Land, for example, does not have regional taxes, thus drawing big investor flows. Infrastructure-oriented projects in the Yamal-Nenets Autonomous Region and Khanty-Mansi Autonomous Region are taking off. In the latter, Uralsvyazinform, the largest communications provider in the Urals Federal District, is also accessing the rouble bond market.

The Republic of Bashkortostan is home to Bashkirneft, Salavat and Bashkirbank as well as republican communications operator, Bashkirtelecom. Former Bashkiria is a well-regarded Russian credit with the first-tier Bashkir issuers also accessing the debt markets outside the Federation.

The Tatar capital City of Kazan is famous for its mosques and historical minarets, as well as its investment programmes. The city has developed dramatically in the last three years. Apart from the federal development plan, Tatarstan has its own republican programme owing to its President Mintimer Shaimiev. Government-owned Tattelecom is the largest communications operation in the republic and has a track of raising funds in the debt markets for further infrastructure development.

Ak Bars Bank is famous beyond Tatarstan and Russia as a top 30 Russian bank. Oil producer Tatneft pumps billions of roubles into the country’s budget via tax of its black gold revenue: Tatar banks are unusual amongst their domestic peers in not heavily relying on government assistance.

Sochi–2012 Winter Olympic Games and the Russian South

The Town of Sochi was never a big player in the domestic market although it is now gearing for the 2012 Winter Olympic Games. There is a separate federal budget for the upcoming sports event while the Southern Russian regions have ambitious plans in the capital markets. Southern Telecom is among top borrowers in the Southern Federal District being the largest fixed-line telephone operator in the region similar to the Volga Telecom in its respective territory. Transport and logistical infrastructures are being brought to the western standards with all eyeing to host the 2012 visitors.

The famous Yalta resort in the Krasnodar Land attracts tourists well beyond the former Soviet Union. Russia’s South attracts not only visitors but investments, with access to the sea boosting the local economy. One of the top three Russian sea ports, Novorossiysk, is an eminent bond issuer, boosting the retail industry with goods coming from all over the world. Banks are concentrated in the Rostov Region with the City of Rostov-on-Don being the financial centre, for example Centre Invest Bank, largest financial institution in the region.

Kant’s Kaliningrad and the Russian Northwest

Emmanuel Kant resided in Königsberg, current Russian enclave of Kaliningrad. The town cannot boast a great track record of bonds issuance but Victoria has been successful there. Leningrad Region and the City of Saint Petersburg are the second largest municipal bonds issuers. Apart from being home to the Russian Imperial family, Saint Petersburg is an official residence of the second largest Russian bank – Vneshtorgbank (VTB) – and other prominent underwriter, KIT Finance despite their capital markets departments are in Moscow. The Northwest Telecom is the largest communications operator in the most developed part of Russia can show off with its increasing profits and a good capital markets track.

Thick forests in the Russian Northwest boost the paper mills while the wood itself has soared in price. The Republic of Karelia and the Republic of Komi has vast gas deposits while the Town of Arkhangelsk has one of the largest sea ports in the Russian Northwest. Lebedyansky, leading Russian juice producer, owns 34% of the market share in the region from just 4% ten years ago. These and other factors are most likely to further attract investors to this region.

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