As world leaders tried to face down Vladimir Putin, UK prime minister Boris Johnson warned the time had come “to bring in some tough sanctions against the Russian regime”.
The “first tranche” of measures he unveiled on Tuesday targeted five small banks and three oligarchs, but were quickly criticised by British lawmakers as underwhelming.
Johnson insisted he had weapons in reserve including “stopping Russian companies raising money on London markets or stopping them even trading in pounds and dollars”. Recent trends, however, suggest such threats carry less weight than they used to.
London has been the go-to market for Russian companies to raise money outside Moscow for the past two decades: Thirty-nine Russian companies have listed in London and raised $44bn since 2005, according to data from FactSet.
But Russia’s reliance on London capital markets has approached its lowest point. Since 2014 — and following the peak of the commodities boom — only three companies have listed in the UK: gold miner Polyus, metals and energy group En+ and discount retailer Fix Price.
UK sanctions put in place as part of an international response to the annexation of Crimea in 2014 also put a brake on Russian activity.
Forty-four equity and debt capital markets deals, raising $26bn, were executed in London between 2010 and 2014, according to Dealogic. In the seven years since, there have been 43, but they raised only $8bn and there have been none this year, it found.
Although down sharply from their peak, 24 Russian companies are still listed in London with a combined value of about $515bn. Most, including En+ and Polyus are traded as global depositary receipts — which represent shares in overseas companies while the issuer holds the underlying shares in a company’s home market — on the London Stock Exchange’s International Order Book. Russia accounts for the highest number of companies in the IOB.
Stocks such as Sberbank, Russia’s largest bank, and energy groups including Gazprom and Lukoil last month traded more than $1bn of deals, higher than many FTSE 100 companies.
As tensions have risen, turnover on Russian stocks rose 66 per cent last month, compared with the same month in 2021 and the $7bn of deals comprised three-quarters of all trades.
The UK does have options to go further. Toughened regulations in 2018 gave the government greater powers to unilaterally act on any area of the British financial system, including the payments networks and securities depository, where hard currency such as dollars and euros are held to settle deals. Most are aimed at ensuring the “gatekeepers” such as bankers and brokers cannot transact business with targeted entities and individuals.
The House of Commons foreign affairs committee in 2019 urged the government to “close the “laundromat” that would end the flow of so-called dirty money being laundered through London.
Earlier this month, the UK extended its powers to target companies and institutions “carrying on business in a sector of strategic significance to the government of Russia”, and its wide-ranging list included energy, mining, defence, IT, financial services and chemicals.
“The Russian money [in London] we’ve always had access to, to control but there’s not been the political will,” said Ross Denton, senior consultant and head of international trade at Ashurst, the law firm. “That’s a completely different issue from what we’re considering now. What we didn’t have is the ability to say to Russian companies that ‘we will make it difficult to make and send your payments from London’.”
Many in the City have turned cautious in recent weeks. Investment banks have been discussing their exposure and how their systems would handle potential market volatility. Fund managers have been moving their risks elsewhere.
“My personal position has been very cautious since last December, end of November,” said Giampaolo Isolani, head of emerging market investment solutions at Amundi, the fund manager, which has been decreasing its Russian equity positions in recent weeks. “We are in a lower position than a month ago.”
If wide-ranging sanctions are imposed that would prevent UK, US or EU citizens from investing in Russian companies, index compilers such as MSCI International and FTSE Russell can delete from indices the securities under sanctions with a few days’ notice.
Abrdn, the fund manager, estimated that more than $20bn could flow out of Russian stocks if the measures were pursued, a large amount in isolation but not when compared with the more than $7tn benchmarked against the MSCI EM index alone.
Abrdn said its Russian equities positions were evenly split between London, New York and the local market in Moscow. “If you went back a decade, we would have had a lot more in depositary receipts because the local market didn’t offer as much,” said William Scholes, investment director of EM equities at Abrdn.
The UK may need to balance its desire for broad and tougher sanctions against hurting ordinary investors, while also trying to show that its capital markets are open to business from around the world.
Nick Bayley, managing director at Kroll and a former regulator, said: “Many of these companies aren’t vehicles of the Russian state. Once you’ve been on the markets for a while it becomes difficult to throw them off. If you’re a big global . . . investor the chances are you’ll want exposure to former Soviet companies.”
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2022-02-23 04:00:36Z
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