Russian revolution

The Russian market during 2005 has been characterised by a diversification of financing products across a broader range of industries; an increase in traditional syndicated financing (although with more sophisticated structures); a development of the real estate and consumer markets; growth in capital markets, especially on the debt side; and a decreasing cost of borrowing.


Capital-raising by Russian retail banks has expanded quickly during 2005. Syndicated borrowings, Eurobond issues and early securitisation transactions have highlighted the huge demand for banks to increase capital. While the volume of consumer lending in Russia is still very low in comparison with Western nations, and even Eastern neighbours, the rate of growth and the potential of the Russian market are enormous.

One of the most significant transactions to occur in 2005 was the first true-sale securitisation of Russian assets, involving a portfolio of car loans. This transaction created an important precedent for future Russian securitisations (initially true-sales were thought too difficult) and its success has effectively created huge opportunities for Russian domestic lenders to realise future receivables now. The freeing up of capital for future lending will have the result of creating more liquidity in the market, promoting further consumer lending.

Additional developments in the consumer lending market have included: the sale of consumer lender Delta Bank to Société Générale; the expansion by international and domestic banks in retail banking; and the recent Sberbank $1bn (£578.6m) unsecured syndicated loan involving 42 foreign banks, which was the largest unsecured loan in Russian banking history.

Consumer goods

Two main trends have characterised the consumer goods industry: capital-raising by Russian entities and acquisitions. Capital has been raised via IPOs and debt issues, with the majority of funds being directed towards expansion. Major acquisitions have taken the form of foreign investors targeting Russian (in cases regional) producers/manufacturers/retailers, such as the acquisition of seven industrial units of local condiments manufacturer Petrosoyuz by HJ Heinz. In addition, major international brewers such as InBev and Heineken have been very active on the market, purchasing market share in one of the few unconsolidated and expanding global beer markets.

Further developments in the consumer sector are likely to include greater consolidation of Russian banks, currently numbering in the thousands, increased capital-raising via both debt/equity capital markets, and borrowing across all consumer areas. Mortgage-backed securities will occur when the legislative framework, currently in development, comes into force (2006-07).

Real estate

Real estate investment has begun to take off in Russia. Real estate financing by international lenders and early refinancings by existing investors are two of the more significant market developments. The complexity of structures undertaken was exhibited in the first Russian residential real estate refinancing involving a 206-unit townhouse complex. The transaction involved the development of complex legal structures secured over residential mortgage receivables, involving full local and offshore security.

Positive judicial developments include the passing of a new law on ‘concessions’. While the law does leave questions unanswered, it is nevertheless a positive step for investors.

Energy, mining and utilities

The oil and gas sector has been characterised by mega-deals in 2005, in particular the syndicated lending to Rosneft of $7.5bn (£4.34bn) and to Gazprom of $13.1bn (£7.58bn) to purchase Sibneft from Roman Abramovich, each a record at the time of lending. In addition, the $7.12bn (£4.12bn) acquisition of a 10.74 per cent stake in Gazprom by the government (via Rosneftegas) set a new standard for mega M&A deals in Russia.

The sector has not been without controversy, such as the ongoing breakup of Yukos and jailing of Mikhail Khodorkovsky and the legal battle for control of the Moscow oil refinery, involving Sibur (the only UK-listed company entirely focused on Russia) and Sibneft.

On a more positive note, the Russian courts recently upheld a foreign court judgment in relation to Yukos creditors – the first time in Russian history, although recently the Court of Cassation remited this decision back to the Arbitrage Court for rehearing. The case involved a syndicate of foreign banks seeking to claim $475.2m (£275m) in unpaid debts from Yukos. The claim relates to outstanding payments from a $1bn (£578.6m) loan issued to Yukos in 2003, and by upholding the claim the Russian courts have allowed the banks to join the list of Yukos creditors.

The transport sector has seen Russian Railways sign a $600m (£347.2m) syndicated loan and additional financings have been made available in the railcar industry. Railcar leasing and production are niche sectors undergoing huge developments, as demand skyrockets based on oil export demand (pipeline limitations) and the expansion of the domestic manufacturing and production sectors.


The trend of outward investment by Russian companies has continued to increase during 2005. The success of the Russian Evraz Group in the privatisation of Czech steel company Vitkovice Steel, and the investment by leading Russian aluminium company Rusal in Australian bauxite mines, are two examples. Expansion by Russian companies has been led by the major industries – oil and steel – but telecommunication companies and retailers are showing increasing interest in regional markets as well as the Ukraine and Kazakhstan.

Russia is being seen increasingly as an important market strategically, and quite distinct from other regional markets. The rate of growth across key sectors is encouraging investment, with the underlying stability providing a framework for continued and new investment.

The market for legal services is becoming more sophisticated, the variety of financing options is expanding, the cost of borrowing is reducing, capital markets are expanding and legislative developments are moving in the right direction.

Overall, 2005 has been a very positive year for the majority of companies; 2006 and beyond is looking equally promising.

Michael Cuthbert is Moscow managing partner at Clifford Chance