Putin Pension Plan Opens $5 Billion Company Hole: Russia Credit

Vladimir Kuznetsov and Ksenia Galouchko

Published: Friday, Oct. 4 2013 8:29 a.m. MDT

Russian President Vladimir Putin attends the Russia Calling investment forum in Moscow, Russia, Wednesday, Oct. 2, 2013.

Alexei Nikolsky, Associated Press

Enlarge photo»

MOSCOW — Russia's $157 billion corporate and municipal bond markets will be the biggest losers from a government freeze on pension fund contributions, according to Goldman Sachs and Sberbank CIB.

Russian companies will miss out on about 160 billion rubles ($5 billion) of bond investments in 2014, according to calculations by Sberbank, the investment arm of Russia's largest lender. That's part of the 580 billion rubles that will be directed away from private pension funds and state manager VEB in a stopgap move to pay current retirees, the data show.

Russia is following Poland and Hungary using pension savings to buttress its budget as economic growth slows. The plan, which bars non-state funds from getting new contributions in 2014 until they re-register as joint-stock companies and join a new insurance program, isn't an attempt to confiscate savings, President Vladimir Putin told a Moscow conference Oct. 2.

"It basically undermines the confidence that Russia is really going to use the funded pension system to develop the financial market," Clemens Grafe, chief economist for Russia at Goldman Sachs, said by phone Thursday in Moscow. "That's the bigger issue for international investors."

The extra yield investors demand to hold dollar debt of Russian companies compared with other developing nations climbed five basis points to 13 on Oct. 2 from a 2013 low on Sept. 19, JPMorgan Chase & Co. indexes show. Companies' ruble borrowing costs for may rise in the coming months due to the pension plan, Alexander Kudrin, head of fixed-income research at Sberbank, said in a note dated Oct. 2.

The premium on ruble bonds issued by companies rated two levels below investment grade at Standard & Poor's and Fitch Ratings compared with government notes fell one basis point to 231 on Oct. 2, the lowest since August 2012, according to an index compiled by UralSib Capital.

Poland will take over and cancel government bonds held by the country's privately managed pension funds to lower public debt by 8 percent of GDP, Finance Minister Jacek Rostowski said on Sept. 5. The overhaul will reduce the funds' assets by more than 50 percent and make Poland more dependent on foreign investors to finance its debt. Hungary nationalized the assets of its privately managed pension funds in 2011 to reduce the nation's budget shortfall.

About 90 non-state pension funds manage a third of the 2.6 trillion rubles that can be invested in securities, according to data from the state Pension Fund. Corporate bonds account for 34 percent of their assets, while 6 percent are invested in stocks, Sberbank said. VEB, which runs the rest of the funded savings, invests 21 percent in corporate bonds and 49 percent in government bonds, known as OFZs.

"It's clear that the loser is the corporate ruble market and sub-federal bonds," Kudrin said. "Declining demand for these instruments will lead to wider spreads to the OFZ curve."

Government bonds may be hurt less than corporate notes because the changes mean Russia won't need to sell as much debt to plug its pension-fund deficit, Kudrin said. That would offset a decline in demand due to the new redistribution plan, he said.

Russia plans to give foreigners access to companies' bonds and municipal debt through Euroclear Bank SA, the world's biggest bond-settlement system, as soon as January 2014. Euroclear started operations with OFZs earlier this year.

"Declining demand could be compensated by inflows from foreign investors once corporate bonds open up for Euroclear," Konstantin Nemnov, a money manager at TKB-BNP Paribas Investments, said by phone from St.Petersburg. That may not help non-investment grade borrowers, he said.

Russia is ranked Baa1, the third-lowest investment grade, at Moody's Investors Service.

While Euroclear access may provide some support, the lack of a broad range of investors due to the pension changes may be a stronger consideration for foreign investors, according to Vladimir Kolychev, chief economist for Russia at VTB Capital.

"Foreign investors will think twice before entering a market they'll have trouble exiting," Kolychev said by phone from Moscow. "There will be no anchor investors to sell to."

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