Non-Western Financial Markets and Russia: New Opportunities

Non-Western Financial Markets and Russia: New Opportunities

The shift in Russia’s economic policy toward the nations of the East is creating brand new opportunities in terms of access to direct investment, investment loans, and other sources of financing. This approach is entirely in keeping with the recommendations from the recent summit of the heads of states and governments of the BRICS countries (held in Ufa July 8-10), including the suggestion that multilateral cooperation be expanded by providing access to sources of funding from the countries that are part of this group.

The first investment credits from the BRICS Development Bank will be disbursed to the countries of that group as early as 2016, and one of those loans is intended to help implement a Russian-South African project to explore, mine, and process ore and metallurgical raw materials.

According to the working groups within the BRICS Business Council, the interest rates of these loans will be at least 25% lower, with payment periods that are 33-50% longer, than the credit terms offered by the International Monetary Fund (IMF) and other Western financial institutions. One crucial detail is that the BRICS Development Bank will be able to offer its loans in various national currencies, thus avoiding the need for settlements in dollars or euros. This is an advantage, because due to fluctuations of the dollar and the euro against most of the world’s currencies, the credits and loans granted in these “global” currencies end up at least 10% more expensive for the borrowers.

And when Russia looks for markets for new foreign lending, those are not limited to the BRICS nations. It is important to note that unlike the principles that guide operations in the West, the financial markets of the Middle East, China, India, Thailand, Turkey, and the newly industrialized countries of East Asia (South Korea, Taiwan, Hong Kong, Malaysia, and Singapore) use various forms of credit that are favorable to borrowers who are industry leaders in the real economy.

The practice of offering credit and investment resources to specific industry and/or socio-economic programs and projects is particularly attractive. It is also significant that, according to estimations by UNCTAD and UNIDO for 2014-2015, no more than 45% of financial institutions in the Third World have direct ties with Western financial institutions through subsidiary partners. The fewest links are found in Southeast, East, and South Asia (generally no more than 40%). That means that the West not only has a “global” presence in the world’s credit and investment system, but it also wields a critically large stake in it ...

Given the West’s war of sanctions against Russia, Russian companies are taking a close look at non-Western financial markets. For example, the energy company Gazprom is considering diversifying its funding sources by turning to Asian capital markets. The company is negotiating with Asian financial institutions over a number of issues, including the possibility of floating Eurobonds in Asian currencies. In June of this year, Gazprom’s global depository receipts were granted an introductory listing and included in the quotation list of the Singapore Stock Exchange. The company is examining the possibility of listing (1) its securities on the Hong Kong Stock Exchange and upgrading the level of its listing in Singapore. Available information indicates that Gazpromneft has similar plans.

Russian Railways, OJSC (RZD) is also calling attention to the possibilities of the Asian financial markets, “We are now working more actively in the domestic credit market, and, of course, in Asian markets as well,” claims Pavel Ilichyov, RZD’s deputy head of corporate finance. “I am confident that we will soon close a number of deals to attract financing from Asian markets.”

A listing in Asia provides direct access to new categories of Asian investors, including pension funds, insurance companies, manufacturing corporations, family foundations, and the management companies of many banks of the countries in that macro-region.

One characteristic of non-Western investors and financial institutions is that they generally do not tend to provide long-term loans or refinance the debts of their partner countries or their companies. For Western financial entities, it is not only economically, but also politically advantageous to prolong and (even better) to increase their foreign partners’ debt burdens. In recent years, this characteristic of non-Western financial markets has been on display, specifically between April 2014 and June 2015, when industrial and infrastructure investment projects were recipients of over 65% of the total credit and investment resources provided by players in these markets to their partners in the Russian Federation.

To put it simply, players in non-Western financial markets would prefer to directly or indirectly fund specific, promising commercial projects than to simply extend loans. One of the most recent examples of this could be seen in the agreements reached between April and July of 2015 on economic cooperation between the Russian and Thai governments and companies in those countries.

These agreements stipulate that from 2015-2019, at least 60% of all the financing extended by those parties will go toward direct investment and investment loans for specific industrial projects in both countries. And for the economic cooperation programs now being explored between Russia and Saudi Arabia, the UAE, Bahrain, and Kuwait, that number exceeds 60% overall.

(1) Listing - a set of procedures for introducing securities onto the stock market. A listing allows a company to enter the securities market, attracting additional investment. During a listing, the security is added to the level I or level II quotation list. The laws of the Russian Federation stipulate that a company must go public with an IPO on one of the Russian stock exchanges in order to be permitted to list abroad.

Tags: BRICS  Asia-Pacific  China  Russia