Interest Rates, Exchange Rate and Liquidity: Are There Resources for Investment?

February 3, 2012


At the beginning of the discussion, panel moderator Ksenia Yudaeva (Director, Center for Economic Research, Sberbank) gave an overview of the macroeconomic situation. The main feature of today’s market is high volatility and ample fluctuations in liquidity. Investors have differing views, and this does nothing to heighten stability. The policy of the Central Bank plays a big role now.

First Deputy Central Bank Chairman Alexei Ulyukaev said that the regulator sees a balance between inflation risks and economic growth in the current situation, which means that the regulator is unlikely to move rates within the next couple of months. At the moment, the Central Bank is maintaining a “dirty” floating exchange rate, but plans to switch to a full-fledged floating regime soon. The amount of Central Bank operations on the open forex market is minimal. He sees commercial banks continuing to use refinancing at the Central Bank, as capital flight is continuing. He expects inflation to come in at 5.5-6.0% in 2012, but believes achieving this level will be complicated. The Central Bank is ready to heighten the transparency of its policy and plans to start publishing quarterly reports on monetary policy. In addition, Mr Ulyukaev mentioned that the Central Bank may use lending in hard currency only as an extraordinary measure and prefers to see balanced positions among commercial banks.

Werner Gey van Pittius, Portfolio Manager from Investec Asset Management, appreciates the recent changes in Russian monetary policy and the Central Bank’s greater transparency (such as publication of the minutes of BoD meetings). He expects more foreign investors to come to the OFZ market after its opening for international investors, and considers these bonds as undervalued relative to current fundamentals (e.g. slowing inflation and current account surplus). Lastly, he said he is ready to continue lending money to the Russian authorities.

Deputy Economics Minister Andrei Klepach thinks that the Central Bank’s policy creates a comfortable environment for development of the real sector. He expects interest rates to decline in 2H12, but remain high until mid-year. The existing volatility is forcing companies to think more about hedging their risks. Mr Klepach thinks that capital outflow may turn into an inflow in 2H12. In addition, he expects the primary markets for both bonds and equities to start operating normally. Lastly, he mentioned that about 10% of Russian GDP is concentrated in the Reserve and National Wealth funds, which are not working in the economy. Attraction of this money to the market is one of the challenges facing the authorities.

Giacomo Baizini, CFO of Evraz Group, mentioned that his company still uses the dollar as its main operating currency (as steel prices, even domestic, are linked to the dollar). At the same time, it widely uses opportunities to borrow in different markets. Over the past two and a half years, Evraz Group has placed R60 bln in ruble bonds, but all these funds were swapped into hard currency, as the company wants to hedge exchange rate risk. Mr Baizini thinks that in the current environment borrowers should find the proper balance between cost of funding and risk. Evraz Group is very opportunistic in terms of choice of instrument for borrowing. At the moment, the company is considering project financing.

Jonathan Muir, CFO of ТNК-ВР, agreed with the previous speaker that the bulk of exporters in Russia use the dollar as their operational currency. At the same time, borrowers need to be more flexible in the current environment. According to him, about 60% of foreign lending came to Russian borrowers from the EU. Due to the European debt crisis, many European banks may be out of the syndicated loan market, which could have a negative impact on borrowers. At the moment, TNK-BP is considering borrowing in different currencies and does not rule out funding in rubles. At the same time, the cost of borrowing will be critical. Mr Muir considers volatility on financial markets to be manageable if policy is transparent.

Thomas Rutz, Fund Manager from Clariden Leu, mentioned that emerging markets offer unique opportunities in an environment of low interest rates globally. He said that diversification is critically important now. The firm prefers investment in the corporate sector in EMs, rather than in Sovereigns or quasi-Sovereigns. Mr Rutz expects rates to remain low, appreciates the heightened transparency of the Central Bank’s interest rate policy and likes investment in the ruble.

Deputy Finance Minister Sergei Storchak said that the Finance Ministry received about R20 bln in interest in 2011 from the placement of money on deposit at commercial banks, and expects such placements to continue. The Finance Ministry is moving toward greater transparency and is talking with investors on a regular basis.

Ksenia Yudaeva summarized the views of the panel members, who believe that inflation may decline further. In addition, the Central Bank and Finance Ministry are likely to be more focused on their core activity, while the real sector will be more concentrated on using existing opportunities in capital markets.