COMMENT: There's zero risk of a Russian sovereign default

By bne IntelliNews October 30, 2008

Research team of Uralsib -

Fear of default: Late last week credit default spreads (CDS) were priced as if Russia were almost in default. With $515bn of foreign currency reserves, daily cash inflows from hydrocarbon exports of $650m (at $60/barrel Urals), and total sovereign foreign debt of $43.1bn, the risk of default is actually zero. Sovereign domestic ruble debt stands at around $60bn.

Zero risk of a sovereign default: The total value of debt in Russia, both foreign and domestic, is approximately $1.26 trillion. This is equal to 74% of the forecast volume of GDP for 2008. Within that debt total, that owed by the state is just less than $100bn, of which less than $40bn is foreign debt. We, therefore, believe that there is a zero risk of a sovereign default. In addition, we consider that the actions taken by the Russian government, and the financial provisions put in place, mean that there is also almost a zero risk to Russia's "high street" banks.

Some companies face problems: Russia's non-bank corporate sector owes an estimated $857bn, comprising of $187bn owed to foreign banks, $116bn of issued eurobonds and $554bn due to domestic lenders. The government has also put financial safeguards in place to prevent any defaults, or debt re-financing problems, amongst the county's most important corporations. But clearly, given the scale of the debt, many of the country's corporations with a stock market listing will have to obtain new sources of finance and, in some extreme cases, may have to sell equity and/or assets.

State will defend banks: The total foreign debt owed by Russia's banks is $193bn (Central Bank data as of 1 July), $18.5bn of which needs to be refinanced by February 2009. The government has, however, made it very clear that it will prevent any "high street" bank from failing, and any that have problems will either be bailed out by the state-owned Development Bank (VEB) or rescued via a deal brokered by the Central Bank and a stronger buyer. To date (26 October) the state has put almost $230bn in place to ensure the banking system is protected and to help major corporations refinance debt.

VEB money to help large companies: The total foreign debt of Russia's non-banking corporations stood at $296bn as of July), $29.0bn of which needs to be refinanced by February. The state has placed $50bn with VEB primarily to help refinance important companies. Companies looking for funds to refinance loans can apply for a minimum of $100m and a maximum of $2.5bn. The committee that will make the final decision on each application is chaired by Prime Minister Vladimir Putin. More than 50% of a company or bank should be owned directly or indirectly by a Russian entity or individual.

Domestic bank debt is $637bn: In addition to $488bn owed by the country's banks and companies, the total level of domestic banking debt is $637bn - corporations owe $481bn and individuals $156bn. It is not known how much credit Russian individuals have borrowed from foreign banks.

Total corporate debt is $857bn: Russia's corporations owe a total of $857bn: $187bn to foreign banks, $116bn in Eurobond issues, $73bn in ruble bond issues and $481bn to domestic banks.

Planned to raise $100bn over two years: Russian companies had planned equity issuance of approximately $40bn in 2008 and $50bn in 2009. This money had been earmarked both to pay down foreign debt and to fund future growth. The total raised so far this year is just over $2.5bn, and the outlook for the next 12 months suggests that conditions will remain tough for equity issuance.

Much less than in developed countries: This sum corresponds to 74% of GDP (Uralsib forecast for 2008) - considerably less than the 150-200% debt to GDP levels in the US, UK and some other EU countries.

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