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#11 - JRL 7135
New York Times
April 8, 2003
Oil Wealth Helps Russia Navigate World Debt Markets

MOSCOW, April 7 -- With the profits from high oil prices lifting Russia up to stardom among emerging markets, Russian companies are hurrying to capitalize by tapping the international markets for financing.

A year ago, only a handful of Russian borrowers had rebuilt enough credibility after the financial crisis and debt defaults of 1998 to have a hope of issuing debt abroad on a large scale. Now, many more companies are in on the act.

According to new figures from the Russian Central Bank, Russian companies added more than $9 billion to their net foreign borrowing in 2002, about triple the increase of the year before, and the trend appears to be continuing in 2003.

"The perception has changed," said Jerome Booth, head of research at Ashmore Investment Management in London."Russia is one of the safer assets in emerging markets now. The economic turnaround has been phenomenal."

On Thursday, the holding company Sistema, which has a number of industrial and financial-services businesses, successfully sold a $350 million Eurobond issue. In March, Gazprom, the Russian natural gas monopoly, sold a $1.75 billion bond issue, a big deal even by developed-economy standards. Wimm-Bill-Dann, a juice and dairy company; Avtovaz, the country's largest carmaker; and Alrosa, a state-owned diamond producer, have all announced plans to sell bonds.

The attraction is low interest rates. Investors are willing to buy Russian bonds at much lower yields than those of a year ago. A benchmark issue of government Eurobonds maturing in 2007 yielded 10.3 percent in early 2002; this week the figure was 5.2 percent. Similar bonds from Sibneft, a big Russian oil company, are yielding 7.9 percent lately, down from 11.5 percent a year ago.

Large Russian companies need foreign financing for major capital projects because the money markets at home are too small to handle the sums required. Over all, the Russian banking system has assets just under $100 billion, less than some individual American banks. The pension and insurance funds that play major roles as bond investors in Western capital markets are almost nonexistent in Russia.

Most Russian companies have relatively little debt because until recently hardly anyone was willing to lend to them. Now they are able to borrow abroad at rates that have steadily become more affordable.

Many of them would rather borrow than sell equity to raise capital because their dominant shareholders balk at the idea of sharing control with foreign investors.

The danger in the borrowing strategy, economists say, is that Russian companies will be more vulnerable in an economic downturn. Where dividends for equity investors can always be trimmed or eliminated in hard times, foreign bondholders must still be paid, and in hard currency.

Analysts said that some Russian companies, with limited track records servicing debt, may be borrowing now simply because they can. That kind of short-horizon thinking contributed to the string of foreign debt defaults by Russian banks in 1998, after a financial crisis flattened the ruble.

A recent reminder of unwise borrowing in an overheated market is the Russian region of Nizhny Novgorod. The region's government sold a foreign-currency bond during the market euphoria of 1997, only to default the next year. After months of negotiations, investors agreed to accept new terms on the bonds, but just last week, the region had to be bailed out by Russia's state-owned savings bank.

For now, fears about repayment are distant. Oil exports were 15 percent higher in the first two months of 2003 compared with the period in 2002. The Central Bank's reserves of $55 billion are many times the size of those it had in the 1990's.

Russia "has been considered kind of a safe haven," said Mark Dow, a fund manager at Massachusetts Financial in Boston, with $1 billion in emerging-market debt. Corporate bonds "have been sprinkled in portfolios in a lot of places in the States," he said. "As long as the valuations aren't stretched and equities remain out of favor, people will continue to be interested."

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