Konstantin Kroll, an M&A and Private Equity partner in Orrick's Moscow office, recently spoke with unquote [subscription required] regarding the challenges facing the Russian private equity market. The economic sanctions imposed by the EU and U.S. against Russia will enter their fourth year in early 2017, and the country's private equity industry continues to struggle.
According to Konstantin, "The market has already shrunk, volume is quite small compared to previous years, but it still operates. Players in the Russian market are learning how to operate in this difficult environment."
Konstantin noted that the overall political instability in Russia adds to the market's difficulties, as many international investors are not willing to proceed with investments or other projects in the country.
"In the past year, I've worked on many deals that have collapsed at various stages, and while deals collapsing has happened in the past, it has not been as often as recently," he said, adding that he has noticed an increase in deals falling through as late as the day before signing. He has also noticed an increase in bespoke deal documentation, noting, 'There is no standard deal model, everything is done case-by-case due to the apprehensions over the current risk environment."
Konstantin continued, "The real problem is not the formal sanctions, but informal sanctions; that is to say, international banks to longer lend into Russia and do not finance Russian projects, because they have no appetite for Russian risk anymore. There are, of course, exceptions, but they are few and far between."
As a result of these "informal sanctions," Russian investors and companies are unable to access funding from other countries, and capital markets in Russia cannot support the demand.
"It has become a huge problem. Russian banks continue to lend, but those banks are also short of financing because they can't raise capital from the West and the Russian Central Bank does not have enough money to bridge the gap, which means rates are very high," Konstantin said.
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