The ongoing process of risk revaluation on global financial markets seems to be far from resolution, and we thus expect volatility to remain high. This year is unlikely to be an easy one for investors and borrowers operating on EMs, including the CIS area. In the current environment, one of the key risks for companies and banks from developing countries is the potential absence of opportunities to raise money on the international front. The capacity of domestic markets in the CIS is not large enough to satisfy all of the funding needs of local borrowers. Big commercial banks, mostly state-owned, will be able to fill the gap for several months if international capital markets remain closed, but this state of affairs will inevitably lead in the longer run to economic slowdown at best, or systematic defaults at worst.

In 2H11, the primary Eurobond market was closed for CIS issuers for more than three months. This was not all that painful for borrowers, as syndicated loans were still available and commercial banks in the region were in relatively good shape to provide financing. But if Eurobond placement is impossible for eight to 10 months, then refinancing problems will become critical for the CIS region, despite the fact that the overall external debt burden is not as high as in many EU countries. This scenario does not look unbelievable, especially on the back of the deepening European debt crisis. In the worst case, it could lead to new bank losses and a reduced ability to invest on financial markets. In our view, the potential absence of external funding should be considered the main risk factor for CIS borrowers in 2012.

There is another feature that unifies all CIS markets – politics. The political factor started to be more important in 2011, and will likely remain a focus of investors in 2012. This is new for Russia (with protests being held after parliamentary elections) and Kazakhstan (with early elections), where politics had been relatively stable for several years. In Ukraine, Yulia Tymoshenko’s case revived political turmoil, which had calmed somewhat since the presidential election. In all these countries, as well as Belarus, several public rallies (that had different motivations) were held. On the back of the “Arab Spring”, which led to the resignation of ruling regimes in several MENA countries, investors started to speculate about similar scenarios in the CIS. We do not think a revolution is possible in any of these countries in the current environment. That said, given the fact that three of the four countries will hold some kind of election in 2012, we think the market will react sharply to political news flow from the CIS.

We believe that this special mix of problems on global financial markets and local political color will define the situation on CIS bond markets in 2012. Of course, all traditional factors, like the oil price for Russia and Kazakhstan, or steel prices for Ukraine, will play a role, but these variables are very well known and already priced in. Volatility on global markets, which can easily shut down primary Eurobond markets for CIS borrowers for the long term, could create significant funding problems that can only be partly resolved via the domestic financial system and local governments. Political turbulence may influence markets even more significantly than economic factors. We expect investors to pay a lot of attention to this component. Risk premiums widened last year (despite the fact that notional yields for Russian Sovereigns declined) and we do not rule out the possibility that political factors could push them even wider in 2012.

Alexander Kudrin. Troika Dialoge