A conference, The Bond Market: Today and Development Prospects, discussed market development trends on October 4, primarily focusing on corporate bonds.
The Russian stock and bond market mostly aimed to meet the state's growing financial demands until 1999, with market players mostly speculating in several highly liquid stock categories. However, the stock market began to attach priority to its main function since 1999 and the corporate bond market started developing rather intensively. Bond issues made it possible to attract additional investment between 1999 and 2003, with the face value of corporate bonds (on the market) soaring from 12.9 billion roubles to 148.2 billion roubles.
As of August 31, 2004, the corporate-bond market totalled approximately 218 billion roubles in terms of bond issues' face value, Sergei Lyalin, general director at the Cbonds.ru public company, noted. This was 36% up on the previous year's figure.
Such impressive growth can be explained by a number of positive external factors influencing the present demand for corporate bonds in Russia. Professor Mirkin from a self-regulating organisation, the National Stock Association, believes a positive factor is that Russian companies that have accumulated tremendous assets are in no mood to spread them thin. Companies are now trying to renounce their dependence on individual financial institutions and to address the entire market instead.
High prices for raw-materials exports are seen as a mid-term factor, which enhances the Russian economy's monetisation, i.e. the correlation between money supply volumes and GDP. This parameter determines the domestic financial market's stability, highlighting nationwide financial-instrument demand. This correlation totalled 50% before 1995, but plunged to 16-17% in the 1996-1998 period. The domestic market shrank as a result and became more dependent on foreign investors. The market had grown by 30% by late 2003 and retained this level in 2004, which is typical of a developing market. If this growth continues, it will stimulate the demand for corporate bonds and, eventually, lead to more business.
Domestic-loan patterns have changed drastically, with the private sector, rather than the state, accounting for the lion's share of all debentures. The state accounted for 65% of total domestic-loan volumes in 1995, but this figure was only 19% last year. This is a positive trend in the context of financial-instrument development, because it highlights reduced state demand for financial resources, which are thus transferred to the private sector.
At the same time, the corporate bond market is bedevilled with numerous problems. The list of investors working with corporate bonds comprises the following three categories: banks (70-80%), institutional investors (up to 30%) and small investors (up to 5%). Mutual funds, pension funds and insurance companies are all called institutional investors. The unimpressive solvency of institutional investors is seen as a serious market problem. Indeed, these investors contributed no more than $15-20 billion last year. In Mr Lyalin's opinion, mutual funds controlled just 2.5% of the entire market. The share of pension funds was even smaller. When talking about insurance companies, any accurate estimates are not available, but it is no secret that such companies are posting substantial growth, and that their assets exceed 300 billion rubles. In the long run, they may take a larger corporate-bond market segment, but their current market share remains insignificant.
Therefore, one can safely say that the Russian corporate bond market is dominated by commercial banks, which control nearly 80% of the entire market. According to Mr Lyalin, bank loans, rather than bonds, are the main debenture instrument nowadays. The correlation between corporate bond volumes and corporate bank loan volumes was 6.1 % in late September 2004. This so far unimpressive parameter continues to grow. The banking sector's unstable summer performance proved that banking-sector fluctuations negatively affected the corporate bond market. Among other things, several major bond issuers, such as Transneft and MTS, refused to float their securities on the market.
The domestic corporate bond market has one important specific feature: it is fighting a losing battle against the Eurobond market. Bonds worth $2.5 billion were floated on the domestic market in the January-August 2004 period, while the corporate Eurobond market received $6.25 billion. This can be explained by the fact that Eurobonds carry a lower annual interest rate in dollars to the tune of 7-9%, with ruble bonds offering 8-10% interest. Moreover, the Eurobond market can attract more money at one go. According to Roman Zilber, Gazprom has attracted 700% more money on the Eurobond market than across the rest of Russia.
Conference delegates also discussed legislative issues, such as the need to abolish the registration of bond issue reports. Mr Lyalin believes this Russian norm, which does not correspond to international standards, forces bond issuers to pay more, thus preventing many potential investors from operating on the market. This in turn puts the brakes on market growth. Work is now proceeding apace to simplify this procedure, Vladimir Gusakov, a representative of the Federal Financial Markets Service, said.
Accordingly, the Russian corporate bond market is continuing to grow quickly, acting as an important financial-market instrument enabling Russian enterprises to attract funds to develop. Experts believe that debentures will continue to replace bank loans on the market. In general, the foreign economic situation has become more favourable over the last few years and the market has become more stable. Despite all the structural problems and drawbacks, the corporate bond market is now a macroeconomic reality, attracting alternative loans, rather than bank assets.
