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Keeping capital markets going in Ukraine
Early this year , Clearstream announced plans to expand its existing link to the Ukrainian capital market with additional asset classes . Global Custodian spoke to Jan Willems , head of product management , global markets at Clearstream about the ICSD ’ s experience in Ukraine over the past few years .
Clearstream began offering a service in Ukraine in 2019 , is that right ? Yes , but we were active in the region long before that . Together with Euroclear , we began working on ICSD access to Russia as of 2004 , 2005 on the loan process that culminated in 2012 with the opening of the Russian bond market . After this we wanted to further expand our footprint in the region . At that stage , the markets concerned were developing with limited market infrastructure . They all had their own challenges when it came to KYC , AML and so on . As of 2016 , we started our offering and broader strategy with Armenia and Georgia . Although they were relatively small markets , we developed an interesting dynamic with the local central banks and Ministries of Finance . Usually , as an ICSD , we like to come into a market with a comprehensive offering , covering all asset classes and all services . In those two cases , we decided with the local stakeholders to focus on one asset : local currency-denominated government bonds . We ’ d also learned from experience that when the investment community enters a market , the first exposure they take is on local “ govvies ”, government bonds . They ' re not going to start with local corporate bonds or local equities . Local govvies we know are simple and , in most emerging markets , free of tax . There ' s no really complex asset servicing . We went live with Georgia and Armenia and that was an instant success . Volumes at the start were not huge , because the markets themselves were small , but we managed to create something there ; as soon as the markets were connected to Clearstream , conversations with large buy-side communities became easier . It was a bit of a chicken and egg story . We then tackled a bigger market , which was Kazakhstan , where volumes were bigger . We did that in 2018 , and again it was an immediate success . Today we have a very healthy franchise in Kazakhstan . Ukraine as a market was an interesting one because it already had several links into Europe with a good presence of European banks locally that could help us out . Together with our local partners , the Ministry of Finance and the National Bank , we built a post-trade infrastructure that ' s suitable for non-resident investors . Bear in mind that after Maidan in 2014 , Ukraine was in the position to substantially grow their economy . There was already quite a lot of foreign direct investment flowing into the country ; It was seen as an agricultural powerhouse , with commodities and IT also attracting interest . We launched our service in Ukraine in 2019 and it also became an instant success . We were able , thanks to the link , to increase levels of non-resident investment well above the equivalent of US $ 3 billion in a couple of months . With more investors coming in , you have yield compression ; you start to create a secondary market on those bonds in Clearstream and all of a sudden it becomes easier for the Ukrainians to start talking with large index providers , the likes of MSCI and the JP Morgan Global Government bond Index . All the big household names started to use Clearstream for the Ukraine connection .
Didn ’ t Covid get in the way ? We went through Covid , which didn ' t have a major impact on volumes . Of course , there ’ s the usual emerging markets volatility to contend with and , sometimes , US dollar risk . When US dollar interest rates go up , money flows out and when interest rates go down , money flows in . We saw the usual pattern of an emerging market . But then came the rising tension around the military build-up on the Russia-Ukraine border in 2021 and early 2022 . Like a large majority of Western Europe , we didn ' t have a catastrophic scenario in mind with a true invasion , but that ' s what we had last February . The post-trade industry has gone through crises before : Argentina , Asian debt prices , and Greece , to name three , but these were all financial crises . We ' d never been faced with a situation where we were active in a country where , all of a sudden , we didn ’ t know if we ’ d be able to reach our local provider , in that case , Citibank Ukraine or the National Bank of Ukraine , our place of custody . As it happened , we always remained operational in Ukraine . Not once did we have to go back to our clients and say , “ We don ' t know what ' s going on ,” or “ We cannot guarantee the continuation of our activities .” Many things locally were already done in the cloud . So basically , you saw the whole capital market moving across and remaining completely functional . Thanks to Covid , of course , a lot of the remote tools were there and could be replicated , albeit in more dramatic circumstances .
34 Global Custodian Summer 2023