Interview from Expert magazine.
The Russian economy turned out to be more flexible and adaptive than expected, but the drivers of its development, including the public debt market, are still underdeveloped. About how the structure of the economy will change in the foreseeable future, says the director of "Expert Magazine Marina Chekurova.
– Marina Viktorovna, do you agree with the statement that the Russian economy as a whole can withstand sanctions strikes? The government speaks about it, and the citizens feel it themselves. But how large is the margin of safety, how long will stability last in the current situation?
– This “margin of safety” is not a constant. It is not finite and cannot be exhausted, since the development of the economy constantly replenishes this reserve. But in order for the margin of safety to be maintained and increased, of course, economic growth is needed as part of a serious structural adjustment. At the same time, growth should have a completely new quality, which would ensure the formation of a new structure of the economy with a higher level of added value than it is now. What is happening now from the point of view of the structural transformation of the economy is precisely what forms the “framework” for the future.
Everything that has happened over the past year and a half suggests that the economy has turned out to be much more flexible and adaptive than expected. This does not mean that you can relax. There is, for example, the problem of real import substitution. A huge amount of work has already been done in this direction, but both the need and the potential for import substitution are far from being exhausted.
The nature of inflation is complex. There are many factors that push it to growth.
One of them, which is often forgotten, is the “inflationary overhang”, which has accumulated for a long time and in various ways, including due to excessive support measures during the covid, as well as the actual anti-covid restrictions. But, even if there were no covid factor and monetary ways to deal with its consequences, inflation would still grow. The process would just be smoother.
The second important factor is the rise in prices for raw materials, largely caused by anti-Russian sanctions and Russia's retaliatory measures. This is a strong blow to Europe, which pulls the whole world along with it.
Another non-obvious, but, nevertheless, real factor is global warming. Associated with it, in particular, crop failures - coffee, rice, wheat, etc. And this also affects prices.
Each of these factors has a share in the total amount of inflation, when combined, a visible result is obtained.
What can be done to beat inflation? First of all - to increase the supply, as well as rationally manage the existing resources. Monetary measures of Western central banks are currently not as effective as before. Yes, thanks to them, annual inflation in the eurozone slowed down in June to 5.5% from 9.2% at the end of 2022, but this level is also very high for Europe. The other day, the ECB raised the base rate for the ninth time in a row - from 4 to 4.25% (with a medium-term target level of 2%). Earlier, the US Federal Reserve increased the base interest rate range by 0.25 percentage points to 5-5.5% - a peak in almost a decade and a half. Annual inflation in the United States slowed to 3% in June (after 4% in May and 6.5% at the end of 2022). But still, it is impossible to raise rates indefinitely - in the end, this growth will still be included in the cost of production. Demand is limited on the other hand, the business has growing costs and the bar for the desired margin. At the same time, business must either reduce margins, which leads to difficulties in financing further development, or, while maintaining margins, not reduce the price level, which directly contradicts the goals of reducing inflation.
Russian economists, the government, assessing the situation, are still inclined to voice some amounts in dollars (even if we are talking about trade between Russia and China). Is this indicator outdated? How relevant is such an indicator as GDP? What new coordinate systems can emerge for an objective assessment of the Russian economy?
Calculations in dollars give comparability. For example, to assess the structure of export-import. Most likely, it will be measured in dollars for a long time - at one time, the transformation of the dollar into a hegemonic currency took about thirty years, the loss of status is also a very slow process.
As for GDP, no other indicator has yet been invented. It seems to me that it would be more correct to look at changes in the structure of the economy, at the movement from, conditionally, a raw material model to another, where the indicator is the growth in the value added of products. It would really reflect the trends. But for now, we'll stick with what we have. Now there is a certain breakdown in the economy, a new wave is beginning. Perhaps this will be the reason for the emergence of new indicators. But it’s too early to abandon the old ones, too. they make it possible to compare even such different economies as Switzerland and Bangladesh.
– What are the prospects for Chinese players in the Russian banking market? Is it possible for Chinese banks to buy Russian players, to what extent and why? How do you think events in this segment will develop in the coming years?
Now a new niche is opening up for them. Many non-European corporate structures (from Asia, Africa, the Middle East) operating in the Russian market were previously serviced by European banks. With their departure, Chinese banks have an opportunity. They can provide not only settlement services, but also lending. I believe that corporate lending will become the main business of Chinese banks in Russia. I don't think they want to do retail. Chinese banks and at home are highly segregated by specialization: corporate banks are engaged in lending to businesses, retail - to the population. These models rarely mix. Most likely, they will be the same in Russia.
I believe that in the short term we will not see any purchases of Chinese players in the Russian banking market. The Europeans are expansionists, but the Chinese always prefer to develop their own structures. Moreover, there is no need for a physical presence on the market now. Perhaps, there will be point purchases on a longer horizon. On how the general policy of doing business in Russia is unlikely.
– Of course, the banking system can provide lending on the required scale. But funding is not. And credit organizations do not set themselves such a task. It is no coincidence that the Bank of Russia has recently been actively proclaiming the need to develop a public debt market. The public debt market should become a real driver of financing the economy. Because what banks can't finance, companies will have to make up for by selling bonds. One of the important tasks is also the transformation of savings of the population into investments of enterprises. And, of course, banks also remain the most important players in public debt, acquiring bonds of companies, primarily those included in the Lombard List of the Central Bank of the Russian Federation, while financing the debt needs of enterprises with access to the liquidity of the Bank of Russia.
At the same time, entering the public debt market remains a non-trivial task for many companies. This will require disclosure of a large amount of information, obtaining a credit rating, serious and expensive preparation. It's not easy for a debutant. Nevertheless, there are prospects for the bond market in Russia. It is important to choose the right exit time. When we see that the key rate is declining or has stopped at a low level, we advise clients not to wait, but to get a rating and exit with placements. It must be understood that the amount of liquidity in the market is limited and will continue to decline. A large share of the liquidity will be taken over by the Ministry of Finance, due to the need to finance the budget deficit through the sale of OFZs. This means that the battle for the remaining liquidity will be serious.
– How is the situation with default in the bond market due to the expansion of financing for small and medium-sized businesses?
– We have observed a fairly even number of defaults in absolute terms over the past 3 years. Thus, in the first half of 2023, 17 issuers from the high-yield bonds (HDO) sector defaulted, and in the same period of 2022 and 2021, 17 issuers defaulted. there were 16 defaults. In relative terms, the share of VDO issuers that defaulted fluctuated in the range of 7-11%. Several factors played a role. Firstly, prepared companies, the best in the segment, entered the market. Secondly, many issues have been circulating for 3-5 years, and they are not “ripe” yet. However, we do not expect massive defaults. In low rating categories, some default events, of course, will be, it is inevitable. The more small structures with high-yield bonds enter the market, the more defaults we will see in absolute terms. But in relative terms, they will be the same or less.
How the VDO market will develop further depends on the timing of preferential bank lending programs and their possible modification. Usually, small and medium-sized businesses resort to bonds when, for some reason, they cannot continue lending in the required amount in the banking market. The lack of high-quality collateral and the problem with guarantees make entrepreneurs think about alternative ways of financing.
– Today, banks are turning to such clients. According to the forecast of Expert RA, the segment of small and medium-sized businesses (SMEs) will be the driver of corporate lending in 2023. Last year, the portfolio of loans in this category showed the highest growth rates (+30%) among all segments of the loan market. Growth is expected to slow down to 25% in 2023 due to the exhaustion of the low base effect of previous years. However, SMEs will remain the most promising part of the corporate client base of banks.
Even 10 years ago, small and medium-sized businesses were a very difficult client for a bank. Now statistics have already accumulated, new scoring models have appeared, banks have learned to better assess risks. This has led to the fact that the opportunities for obtaining loans from SMEs have expanded significantly.
True, the problem of provision, which I have already mentioned, remains acute. Guarantee programs, with which various regional funds work, have significant limitations in terms of volume - 3-5 million rubles. For a very small company, this is a good help. But not for medium businesses. Now medium-sized businesses are the most vulnerable category of SMEs. Having ceased to be small businesses, such businesses lose benefits, do not receive guarantees in the required amount from funds, and banks require high-quality large collateral from them. I believe that the idea of extending benefits for companies that have grown from the category of small to medium is correct. After all, this segment of business is the most promising. Including, and as a potential source of new bond issues. But for this, companies need to become transparent. Unlike banks, where information remains confidential, the public debt market requires full disclosure, including in business-sensitive areas. Entrepreneurs need to overcome their fears and learn how to disclose information well.
– What future, in your opinion, awaits digital financial assets?
The topic is important and interesting. However, for the development of the market, many issues still need to be resolved. The current volume of issues of digital financial assets (DFA) does not exceed 20 billion rubles. In the near future, DFAs are unlikely to radically change the landscape of the Russian financial market, however, in the medium term, such instruments may become in demand in certain segments and competitive.
For DFA issues, there is less strict regulation of the placement procedure. This allows you to make issues faster and cheaper, so the technology will be actively used in the field of short-term funding, including factoring, B2B lending. The advantage of DFA is the flexibility of smart contracts on which such tools are built, which also makes the segment of structured products promising for them.
A lot of expectations are related to the advent of digital securitization, which in this form should become cheaper for banks. How it works? The bank has a portfolio of certain loans. They are separated, tokens are issued against them, which are acquired by investors and whose maintenance comes from proceeds from loans. Theoretically, the process of maintaining a portfolio through automation should be simplified. However, unfortunately, there are legal restrictions for such transactions. Numerous other legal issues also need to be resolved in order to launch pilots.
In general, while investors and issuers are cautiously getting acquainted with the topic of the DFA, they are studying the benefits and risks. Analytical work to support such assets can be done by a few players in the market. For example, "Expert RA".
The topic related to digital currencies is a little different. Here the prospects are huge. This is a global trend, from which Russia does not lag behind. In the future, such tools could solve the problems of cross-border settlements and help replace SWIFT. But digital currencies are not DFAs.
– How did you solve the problem of non-public disclosure of information by some of your clients in 2022? What new things did you have to bring to your work in connection with this? Has the situation with information openness changed now?
– Of course, public information is important to us. We used it to start analyzing the company - to go deeper, to ask questions. This opportunity in 2022 was very limited for us.
As before, we work with clients under confidentiality agreements. According to them, we get a significantly larger amount of information than from public disclosure. Now, when public disclosure is very limited, there is an information bias: investors, to whom we give an indicator in the form of a credit rating, do not have the opportunity to conduct their own analysis of the company. This greatly increases our responsibility. We have become practically the only channel through which information enters the market. At the same time, at the request of clients, we are often very limited in disclosing information in press releases. The situation is not easy.
Now the defrosting process has begun, and this is very good. The government has already taken the relevant decision. An exhaustive list of information that is allowed not to be published will be formed, the rest will again be subject to public disclosure. For investors, this is very important, because it is not the absolute figure that matters, but the trend, the trend. Unfortunately, the data gap caused by the temporary refusal to publish information publicly will remind of itself for a long time: all this time it will be more difficult to make investment decisions.
– Are you aware of the mood in the investor community associated with a sharp decline in the transparency of Russian business in general and banks in particular? Have they changed throughout the year?
Yes, we are aware of these sentiments. The community froze last year. Institutional investors who manage other people's money froze their limits until the situation was clarified. Now that disclosure is restored, they will have to do a lot of work to restore or revise the limits. Because over the past time, the companies in which they invested could have changed a lot.
– At a recent congress of the Bank of Russia, you put forward an initiative to oblige issuers to maintain a rating until the end of the public circulation of bonds. What is it connected with? Do institutionalists support this idea, why?
– I believe that companies should play fair with the market. That is, to constantly show all the changes that occur to them for the period of circulation of bonds.
The situation is very bad when a company with a good rating changes dramatically for the worse and it decides to terminate the contract with the agency, which automatically leads to the withdrawal of the rating. This has an extremely negative effect on institutional investors. Because the securities of a company without a rating can only be in a high-risk portfolio, and for such securities there are very strict limits. When ratings are not dramatically downgraded, investors have plenty of room to maneuver. But if the rating is withdrawn, then this is a stalemate. Therefore, the institutions are for issuers to maintain ratings until the bonds are redeemed.
– In 2020-2021, it seemed that the so-called ESG (environment, social policy and corporate governance) was finally established as the central financial topic. In 2022, many felt that this topic was no longer relevant. However, you are actively engaged in it and even, according to the sensations, are constantly expanding the scope of your activities in this area. Why? What do you think is important on this agenda? What are her prospects in Russia? How is the agenda developing at the suggestion of the rating industry?
– Yes, in the spring of 2022 it seemed that the ESG agenda was no longer relevant. But in the autumn she returned. First, there were discussions, conferences, and other public events. And then new customers began to come for ESG ratings.
It is interesting that this happened in the conditions of separation from international capital markets, where the main demand for ESG was formed earlier. Unfortunately, the greenium effect (profitability of green bonds compared to conventional ones) has not yet formed on the Russian market. But business already understands that ESG is a good practice. Having an ESG rating is becoming a good thing.
The ratings industry certainly supports the ESG trend. Expert RA sets the pace for the entire industry here: the agency is the market leader in terms of the number of assigned ESG ratings, verified ESG financing tools, and methodologies related to sustainable development. This is confirmed by the first place of Expert RA in the impact ranking of rating agencies INFRAGRIN RA 2022, which was compiled to assess and rank the contribution to the process of ESG transformation of the economy. In addition, the agency is actively involved in the development of a theoretical framework for regulating the ESG finance and ESG rating industry. So we welcome this topic in every sense and actively promote it at all levels.