Veteran Bloomberg analyst Mark Gilbert wrote a prescient and excellent book in 2010 titled «Complicit: How greed and collusion made the credit crisis unstoppable«. Today he performs an analysis which could well be another of his clairvoyant premonitions: Russia could revolutionise classic bond issuance due to the interest generated by its low indebtedness, but above all due to the fact that it is under Western-imposed sanctions that prevent banks from operating with that country normally.
For more than 50 years, debt issuance processes have been in the hands of investment banking clans, who syndicate all the paperwork, find primary institutional buyers and underwrite the issuers« money even if the buyer fails. Their tasks are to take the pulse of the market to determine the price to be paid for the issue and to generate interest in it, to provide price stability beyond the first transaction by creating a market and counterparty, and to decide to which institutional investor they give the »privilege" of buying a bond for which there is huge demand (and therefore an immediate capital gain), or vice versa. In other words, an unconfessable trade of favours, very similar to what they do in IPOs, and which also generates brutal income for them: so far this year alone, according to Bloomberg data, 156 banks involved in syndicated sovereign bond sales have taken an average of 0.8% of total issues. That is nothing.
But investors no longer live in the 1960s - when the first Eurobonds were issued - where financial information was only held by these private banks. Today any institutional - and individual - has direct access to economic databases with just a couple of clicks on Reuters, Bloomberg or even Google. They can see exactly how the Russian state's outstanding debt issues are trading in real time, as well as all the official data that is published (which need not be reliable, any more than almost any other country's, but that is another matter). They can even take the pulse of interest in new Russian issuance from other Asian institutions with just a couple of emails. Moreover, paying a few tenths of a point too much when a Russian bond is paying 3% in usd with a 2019 maturity is not the least important given the global yield desert.
Today, unless it is an IPO of a new and unknown company, the role of the banking clan in sovereign debt flotations is totally superfluous. Even in many IPOs their role is more distorting than stabilising, for opaque and reportable reasons. Nevertheless, they act as an organised clan that an issuer can hardly do without within the establishment. Mark Gilbert has been asking for more than a decade why technology has not already led us to an electronic bond trading market that connects issuers with investors. The answer was given last October by Anshu Jain, former CEO of Deutsche Bank: «There's a big fat moat around banking». And that clan, lobby, mafia or whatever we want to call it is what has kept technology at bay.
But in Russia's case the issue is not whether Putin wants to do without investment banking intermediation, but that Western sanctions prevent the banking clan from carrying out its usual institutional wheeling and dealing. In other words, political sanctions imposed by the US can have a disastrous side-effect for US and global investment banking, which pays obeisance to Western sanctions. A revolution in the bond market exit process is on the cards. Putin has it in his hand, and it will have taken a shot in the foot from the Obama administration to change the paradigm. What can the West do to prevent it, sanction institutional investors as well? It may try to exert as much pressure as it can, but it seems a losing battle if Putin decides to open up this new path. He has a good hand and a few aces up his sleeve.
Undoubtedly little investor interest in new bond issuance would abort such a new way of going to market, but this is not the case for Russia. Even if sanctions did not prevent it from doing so, there is no need for the investment banking mafia to generate interest in Russian issues. Putin has not issued international debt since 2013, and the interest is very clear on many money tables. What justifies this? On the one hand the tremendous shortage of yield on all the bubbling global debt (even Argentina is placing debt again despite its periodic and endemic defaults). On the other hand, Russia has a very low debt-to-GDP ratio of around 18% despite its falling GDP in the wake of the oil price collapse. On the other hand, inflation is already under control at 7.3%, which many developed and heavily indebted countries would like to see in the current scenario of quasi-global deflation. And finally, a currency devaluation on demand according to the price of crude oil, also envied by many countries immersed in the global currency war. Nor should we overlook the russian influence on allies not strictly Western powerhouses.
Western sanctions have paved the way for Russia to revolutionise the archaic system of bond issuance that dates back to the pre-technology era and is still dominated by the banking lobby. Its intermediation in Russian debt would only be justified by the sheer paperwork involved, but in the face of the current sanctions it would not be too difficult for Putin to find an independent provider to handle it. Western sanctions and the attractiveness of the Russian economy in the face of the global yield desert may achieve what technology has failed to do - leap the banking clan's privilege moat. And if Putin does not decide to do so in the near future, it will have been in exchange for some counterpart western unconfessable.