It is hard to believe it is barely a month since the London IPO of hypermarket chain Lenta was being hailed as the start of a new era in Russian equity capital markets.
Announced in late January, the $952 million listing initially drew an enthusiastic response from investors eager to buy into the Russian consumer story and was expected to be closely followed by Detsky Mir, the largest children’s goods chain in Russia, and the local subsidiary of German retailer Metro. Credit Bank of Moscow joined the list of IPO aspirants in February, and even the Russian government announced its intention of restarting its much-delayed privatization programme this year.
All that is clearly now at an end. Instead of being the triumphant forerunner of a new wave of Russia listings, Lenta looks set to go down in history as the last man out before the Crimean crisis shut international equity markets to Russian names for the foreseeable future.
If any further encouragement were needed for equity investors to steer clear of Russia, it was provided by Jay Carney. On March 18, as the US moved to impose sanctions on Russian officials, president Barack Obama’s chief spokesman helpfully noted that investors should avoid Russian equities – "unless you’re going short".
This will obviously be bad news for ECM bankers covering emerging Europe – and might well presage a further scaling back of investment banking presence in Moscow after years of below-par issuance and a succession of false dawns.
A Russian Eurobond drought is an even more daunting prospect. CEE bond bankers have grown highly dependent on Russian borrowers, both banks and increasingly corporates, in recent years. According to Dealogic data, international issuance out of Russia reached a record $52.7 billion last year from 90 transactions, more than a quarter of the total for the entire CEEMEA region.
As of late March, the outlook for Russian bonds was still very uncertain. Debt capital markets bankers were optimistic, cheered perhaps by the Russian government’s apparent determination to maintain global market access – banks were asked to pitch for a mandate on a sovereign deal even as Russian troops were moving to occupy Crimea.
Yet most market observers agreed that, even without a further deterioration of the political situation, a Russian sovereign deal would be unlikely to receive a welcome from investors before the summer. "We certainly wouldn’t be advising them to come to market any sooner," said one syndicate official.
And when Russia does come to market, it will almost certainly have to pay for the privilege as investors demand a hefty premium to compensate for the increased risk of sanctions and trade wars. For Russian banks and corporates as well, access to international capital is going to become more expensive for at least the next few years.
Even longer-lasting is likely to be the impact on those in governing circles who had ambitions to transform Moscow into a genuine international financial centre. Russia never seemed fully committed to the project, on the one hand shilly-shallying over privatization and legal reforms, but at the same time pushing ahead with the listing of the Moscow Exchange and the introduction of Euroclearability for domestic securities. It is clear now which side policy favours.
Barring an unlikely North Korean-style retreat behind its borders, Russia will succeed in attracting international capital again in due course, at a price. But the chance of Moscow becoming an international financial centre in any sense that the west would recognize is now dead in the water for another generation.