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   September 23
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Analysis & Opinion
08.12.11 In The Eye Of The Storm
By Tai Adelaja

The political rumblings in Moscow may have started to take a toll on the country’s economy, an indication of the tough challenges that will face Russia’s two paramount leaders when they assume office in new roles next year. The spate of opposition demonstrations after December 4 parliamentary elections has forced a state bank to cancel its bond placement, while two Russian mining companies have sought refugee abroad amid fears of political instability.

For the first time since the upheavals of early 1990s, VneshEconomBank (VEB), a state development bank, has been forced to postpone its planned Eurobond issue, which the government normally uses to fund its credit-investment activity, the Kommersant business daily reported on Thursday. Bond investors who initially showed interest in buying VneshEconomBank bonds have started to withdraw their applications, as uncertainty clouds political future in Russia, the paper said. Two other Russian companies – state-owned Russian Railways and the Anglo-Russian oil firm TNK-BP – are planning to meet investors next week in what could be a litmus test of investors’ sentiments toward Russia after the elections.

Russian mining companies Polymetal and Evraz became the first Russian groups to be admitted to London’s Financial Times Stock Exchange Index (FTSE 100) in a move that will help them escape "rising country risks as Prime Minister Vladimir Putin attempts to reclaim the Kremlin," Bloomberg reported on Thursday. Both companies became eligible for inclusion after moving their main listing to London, the agency said. Evraz, 35-percent-owned by Roman Abramovich, only floated on the London Stock Exchange on November 7, while Polymetal, owned by Alexander Nesis and Alexander Mamut together with Czech investor PPF, started conditional trading on the London market on October 28, Reuters reported.

While both companies dropped out of the MSCI Russia Index in favor of the FTSE 100’s wider range of investors, analysts also saw a political undertone in their decisions. Steelmaker Evraz Group SA warned in a prospectus issued in October that Russian Prime Minister Vladimir Putin’s move to return as president could cause protests and unrest. Any suspension of economic reforms or lack of consensus between the president, government and powerful economic groups could cause Russia’s investment climate to deteriorate, Evraz said.

Up to 5,000 protesters rallied in Moscow on Monday evening to contest Russian parliamentary election results, which opposition groups and observers said was marred by violations. Hundreds also took to the streets on Tuesday to demand an end to Russian Prime Minister Vladimir Putin's 12-year rule. Putin is seeking to return as president in March, and has said he could appoint President Dmitry Medvedev as prime minister if his bid is successful. Putin’s United Russia had its biggest election setback on December 4 after losing its super-majority in the State Duma.

However, VEB, which had to postpone the placement of five-year Eurobonds on Tuesday, appeared to be the first causality of the string of protests after the elections. The planned bond-issue could have fetched the bank, which has been very active in public debt markets lately, up to $500 million, with an annual yield estimated at 5.625 percent. VEB had planned to close the books on the Eurobond deal on Tuesday before news of massive protests in Moscow spooked investors, forcing many to call and take out their bids, according to a source cited by Kommersant. Russian stock indexes plummeted by more than four percent on Tuesday, sinking deeper into the red than any other world stock indices amid foreign investors' increased fears of political instability in the country after Sunday's parliamentary election, RIA Novosti reported.

Statements by high-profile figures, like the one by U.S. Secretary of State Hillary Clinton criticizing Russia for a parliamentary election she called “rigged,” have also added to VEB's bouquet of troubles. "Many foreign investors withdrew from the deal after U.S. Secretary of State Hillary Clinton criticized the recent parliamentary elections in Russia at a meeting of the Organization for Security and Cooperation in Europe," said a government source quoted by Kommersant. However, Russian investors have even acted with greater alacrity as the news of the protests spread, with many refusing to participate following Tuesday's slump of Russian stock indexes. VEB declined to comment, but the Royal Bank of Scotland, or RBS, one of the banks managing the deal, said VEB would postpone its Eurobond placement till next year because of "the adverse effects that current events are having on the Russian market." "VEB has decided to issue the bonds when the market stabilized," the bank said.

While postponement of Eurobonds placement would not have an adverse impact on VEB in the short-term, the long-term implication for the Russian economy could be more serious, as VEB refinances Russian companies' and banks' debts to foreign creditors. Russia's non-credit institutions would have to pay off $12.57 billion in debt to foreign creditors in December, and another $12.8 billion in the first quarter of 2012, according to the Central Bank. In addition, Russian banks and financial institutions will have to pay their foreign creditors $3.54 billion in December, followed by another six billion U.S. dollars in the first quarter of next year. If VEB has difficulties raising funds to refinance such debts in the West, experts say, it will have to turn to the domestic debt market, adding to risks of a hike in the domestic lending rate.
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