Russian dealmakers are facing a downturn in mergers and acquisitions as Western sanctions against the country’s invasion of Ukraine bite, dealmakers told this news service.
The country’s M&A – already in a tailspin following Russia’s initial invasion of Ukraine in early 2014 – dropped by half in 2021 when USD 31bn-worth of M&A across 275 deals took place, down from USD 62bn and 679 transactions in 2020.
A similar picture is reflected in Russian investment banking fees, according to Dealogic data. Fees paid for work in M&A, equity capital markets and fixed income peaked at USD 848m in 2013, the year before Russia’s annexation of Crimea. Investment banking fees dropped as low as USD 126m in 2018, before slowly rising to USD 417m last year, the highest level since the 2014 sanctions.
A rush for the exits
Western corporations and investors are scrambling to exit Russia. But their path to doing so is complicated after Western leaders agreed to cut key Russian banks from SWIFT, a messaging system that banks use to transfer money globally.
That move hampers the ability of local buyers to secure acquisition financing and leaves Western vendors in a legal minefield, one regional banker said.
They include BP [LON:BP], which intends to sell its Rosneft [MCX:ROSN] stake, and Norges Bank’s sovereign wealth fund, which plans to divest its Russian investment portfolio, noted the regional banker.
Other potential exit candidates include Daimler’s [ETR:DTG] co-investment with Russian truck manufacturer Kamaz [MCX:KMAZ] and ride-hailing company Uber [NYSE:UBER], a Moscow-based M&A lawyer added. Uber on Monday said it would accelerate the planned sale of its stake in Russia’s Yandex.Taxi.
Shell [LON: SHEL] earlier this week outlined its intention to exit its joint ventures with Russian gas group Gazprom [MCX: GAZP] and any related entities. All ongoing exit processes will now be sped up, the lawyer added.
Adding to the difficulty of moving capital around is foreign exchange volatility, the regional banker said. The Russian ruble plummeted 30% against the US dollar on Monday. And with a 20% base interest rate, financing new non-cash deals or refinancing existing debt is out of the question, for now, two Russian bankers added.
The UK government on 28 February said it would impose additional sanctions on Russia that would target its central bank, companies, Russian elites and financial institutions, including freezing the assets of state-owned VTB, Russia’s second-largest bank, as announced.
Russian corporations subject to sanctions may be forced to sell their foreign holdings at firesale prices, another Russia-based dealmaker said without naming any specific targets. “Will there be any buyers in this environment?” the first regional banker asked.
The EU is poised today to stymie access by Russian banks to the international SWIFT transfer system, according to a source familiar with the situation, echoing earlier reports, although such measures are not expected to touch banks responsible for the lion’s share of gas and energy related transactions in the short term. Such sanctions are designed to prevent state sponsoring of the Ukraine attacks, not to target Russian civilian financing, the source said, adding that the agency understands that global financial transactions will be hit, and both sides will be harmed by the measures.
Unlike the US, the European Commission (EC) does not currently monitor transactions conducted using SWIFT, a situation likely to change as the EC seeks to assess the impact of the SWIFT sanctions on transactions, according to the source. The existing measures could be tightened following such assessment of their impact, and extended to cover more banks and territories such as Belarus, according to the source.
Slim pickings
Some bright spots for Russian dealmakers remain. While the overall size of the market is bound to decrease, the size of investment banking fees for individual deals is not expected to change significantly, the first Russian banker said.
Advisory mandates for relocating Russian companies abroad, a growing trend since the March 2014 annexation of Crimea, could be an opportunity for Russian dealmakers, a second Russian banker added. Growth-oriented Russian companies that are looking to scale up globally may prefer to move abroad while the domestic venture capital market shrinks, a Russia-based dealmaker speculated.
Cross-border transactions, private equity, as well as growth cap raises are all on hold, one Russian banker said. However, discussions on some domestic transactions are expected to continue, a regional adviser said without naming which deals. Some potential bidders with access to liquidity in rubles are already actively chasing opportunities, the second Russian banker said.
Amidst the confusion and with more clarity only expected in a few weeks, one potential trend that may emerge is the reversal of cross-border deal flows. Foreign-held Russian assets in sectors such as fast-moving consumer goods, pharmaceuticals, technology and automotive components are expected to be sold to local buyers, another Russian banker said.
Foreign-held assets in Russia’s oil and gas sector may be nationalized through state-run companies, he said.
According to a local news report, Russian authorities have already initiated moves to restrict foreign investors' ability to exit Russian assets.
Some targets could also attract the interest of Indian and other Asian buyers, the same banker said. Chinese interest in Russian assets failed to materialize after the first round of sanctions in 2014, but China-US relations are in a worse shape now and such deals may be more likely, the M&A lawyer added.
