Ralph Atkins: Russia debt freeze is lesson for Hong Kong

Beyond a few wobbles, global markets have proved remarkably indifferent this year to political risks – whether Russia’s incursions into Ukraine, Iraq’s descent into chaos or democracy protests in Hong Kong, which have this week tested China, the world’s emerging superpower.

Or have they? A closer look at the impact on international capital markets of the west’s stand-off with Russia tells a different story: of paralysis and the drying up of hard currency flows.

While a fall in the rouble this week has flashed warnings about capital flight, the broader effects have so far gone largely unremarked. Western banks are understandably unwilling to talk publicly about Russian business. The economic impact is also hard to gauge, with the weaker currency softening the impact.

But the way in which debt markets have gone beyond actions taken by politicians, and in effect imposed wide-reaching “market sanctions” on Russia, offers lessons for what happens when conflicts escalate into geopolitical events in an age of globalisation.

Although we are a long way from that point in Hong Kong and the circumstances are very different, they are worth bearing in mind as events unfold in the former British colony.

After the shooting down of Malaysia Airlines flight MH 17 over eastern Ukraine in July, the US and EU acted to stop Russia’s biggest banks, energy and defence companies issuing debt of longer than 30 days’ maturity in western markets. The impact went beyond the targeted companies, however.

Since then, international debt issuance by Russian entities has come to a complete stop, according to Dealogic. Russian banks operating in London have been excluded from non-Russian debt deals. Russian companies no longer list on UK exchanges.

Do not be over concerned. Markets are not boycotting Russia because of moral outrage; they remain apolitical. Historically, global investors are unafraid of backing dictators and despots. “They would get around their morals if the value was right,” says one London banker.

A glance at a chart of weekly flows into and out of Russian equity funds this year shows footloose, anonymous money fled at tense moments, but returned opportunistically when they eased.

Instead, it is a simple risk, reward calculation that is denying Russia access to global debt markets. It is not just the uncertainty over whether Russian counterparties will meet liabilities. A US-led surge in heavy fines for western banks breaching rules or busting sanctions has left them on edge.

Links with Russia are a red rag to risk managers, compliance teams, sanctions units, legal departments and reputation committees. “For box tickers on credit committees, it is more than their job’s worth. They take fright,” complains one Russian bank official.

Regulators have added to the nervousness, perhaps – or perhaps not – accidentally. There is a fine line between stepping up checks on banks under stress and actions which increase those tensions.

The same bank official complains the US Federal Reserve has “played dirty” by obstructing Russian institutions. Andrei Kostin, VTB’s chief executive, warned in April that “political motivation” lay behind Bank of England pressure on the Russian bank’s London operation. The BoE refuses to comment.

Sidestepping “market sanctions” will not be easy for Russian borrowers. Asian markets might offer an alternative source of finance but Chinese banks that need foreign currency funding will be wary of risking their standing in European and US markets.

Although Russian companies will refinance by printing roubles or using foreign reserves, the country’s exclusion from global markets could soon bite. EU officials have warned that Russia’s three big banks alone will need $75bn from its central bank over the next 18 months. Angela Merkel, German chancellor, this week saw little prospect of official sanctions being relaxed any time soon.

Were political tensions in China ever to threaten economic links with the west, the impact would be dramatically larger. The Hong Kong protests do not yet represent a challenge as great as Tiananmen Square in 1989.

Back then, however, the world was riding a wave of globalisation. Post the collapse of Lehman Brothers, longstanding relationships between economic growth and trade have been eroded – and Russia illustrates globalisation’s new fragility.


Ralph Atkins



Fonte: FT