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A nation must think before it acts.
In late December 2018, the Russian capital markets quietly passed a significant milestone: a refuse-processing company, Resursosberezhenie KhMAO, listed on the Moscow Exchange the first green bonds ever issued by a Russian company. The proceeds will be used to establish a municipal recycling and refuse processing facility in the Khanty-Mansiysk region. While the transaction was small (₽ 1.1 billion, US$ 16.4 million), it marks Russian issuers’ long-awaited entry into the green bond market and lays the groundwork for bigger transactions, including eurobonds.
What are green bonds anyway?
As with any bonds, the issuer borrows money from bondholders in return for promising to repay the money borrowed, plus interest. Unlike conventional bonds, however, the money borrowed by an issuer of green bonds is earmarked for environmental projects for renewable energy generation, clean transportation, sustainable waste management and the like, thereby allowing the issuer to court the increasingly large community of ethical investors.
The risk is that unscrupulous issuers may describe their bonds as green even though the environmental benefits of the activities funded are at best questionable. To combat this ‘greenwashing’ risk, a market practice has developed whereby bonds marketed as green are expected to align with a ‘green framework’ – most often the ICMA Green Bond Principles(which was used for Resursosberezhenie’s bonds). Such frameworks set out broad categories of green projects (further defined in various ‘green taxonomies’), and make recommendations as to disclosure, monitoring use of the funds and – importantly –independent third-party review of the ‘greenness’ of the bonds.
What took so long?
Following the first issuance of corporate green bonds in late 2013, the global green bond market has expanded at pace. Even in the past four years, green bond issuance worldwide has nearly quadrupled – rising from US$ 37 billion in 2015 to US$ 136 billion in 2018, according to Bloomberg data.
While the most active green bond markets are in China, the U.S., and France, issuers from over 50 countries have issued green bonds. Yet, until now, Russian issuers were conspicuously absent. This was at first glance surprising, given that at least two factors point to Russia having been ‘ripe’ for green bonds for some time. First, there is plenty of scope for green investment in Russia thanks to its abundance of exploitable natural features (such as its vast river network) and the prevalence of heavy industries looking to clean up their act. Second, green bonds have the blessing of the government. Of the ₽ 4 trillion to be channeled into the ‘Ekologiya’ environmental investment initiative announced by President Putin in 2018, just ₽ 275 billion has been allocated from the state budget. The rest is to come from private investment, including, as the Minister for Natural Resources and Ecology recently announced, green bonds. The government has even mooted subsidizing such bonds by refunding up to 70% of the interest paid to investors.
Nonetheless, would-be Russian green bond issuers have been faced with a number of disincentives.
Resursosberezhenie’s green bonds raised roubles on Russia’s domestic capital market; the next milestone will be the issuance by a Russian issuer of green bonds to raise foreign currency on the international capital markets – in other words, a green eurobond. Given that such a plan has piqued the interest of heavy industry giants Rusal and Norilsk Nickel, there is good reason to think the next milestone is rapidly approaching.
Matthew Fisher and Ed Hicks are lawyers in the London office of Cleary Gottlieb. Their practices focus on high-value corporate/financial transactions in the Russia and CIS markets.
Matthew Fisher may be contacted via email, LinkedIn or Twitter; Ed Hicks via email.
This article represents the views of the authors only and does not constitute legal or financial advice.