Fears of a Russian credit crunch greatly exaggerated, say analysts

By bne IntelliNews October 14, 2014

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On paper, Russian companies  have huge foreign debts, and no way of refinancing them because sanctions effectively close Western capital markets to Russian borrowers. But with much of Russian corporate foreign debt in fact hidden equity investments from offshore zones, the figures seem much worse than they are.

International headlines are predicting a looming liquidity meltdown in Russia. Russian companies must pay down $134bn in external debt through the end of 2015, with a major spike of $32bn coming up in December 2014 alone, according to Russia’s central bank. 

But an accounting trick widely used in Russia may be misleading pundits on corporate liquidity in Russia, say experts: for many larger Russian firms, foreign debt is nothing other than equity injections from shareholders incorporated in offshore zones such as Cyprus or the British Virgin Islands, with interest paid on the debt a tax-minimising strategy to take profits. 

Real foreign debt may be almost half of the figure on paper. “The figure [$166 billion foreign corporate debt through 2015] is quite overestimated as it includes inter-company transactions. I think the realistic estimate amounts to not less than $90bn, which are to be raised from domestic sources," Russia's economy minister Aleksei Ulyukaev said in a boisterous speech to the Duma on October 8.

According to Russia's central bank, of $220bn in foreign loans taken out by Russian companies in Russia in 2013, close to half were raised in offshore jurisdictions, such as Cyprus, Ireland, Luxembourg and the British Virgin Islands, rather than from international banking centres. Counting through all the eurobonds, syndicated loans and bilateral loan agreements, gives a figure of $70bn-90bn in debt to be paid down through 2015, similar to the figure quoted by Ulyukaev, say experts.

This is also why foreign currency lending to Russian corporates has been little affected by the sanctions. "FX-denominated credit growth has remained robust," says Neil Shearing of Capital Economics, "given that financial sanctions have locked large parts of the banking system out of Western capital markets."  

Moreover, much of Russian companies' genuine foreign debt - some analysts says around half - can be attributed to Russia's state-owned energy giants Rosneft and Gazprom. Rosneft alone owes around $32bn to be paid by the end of 2014, debts incurred to pay for the acquisition of oil company TNK-BP in March 2013. But both Rosneft and Gazprom are receiving huge advance payments from China for contracted oil and gas supplies.

Beside the state behemoths, Russian corporates are less leveraged, having learnt a lesson during the last credit crunch in 2008-9, which forced them to pay down debt. According to credit agency Standard & Poors, Russian corporates total outstanding eurobond debt equals $90bn, but with a paltry $2.3bn to be paid down through end of 2014, followed by $8bn in 2015. "The maturity profiles of these debts appear manageable," write S&P analysts.  "Companies should be in a position to replace maturing Eurobonds with bilateral loans from the banks," the analysts add.

The bigger problem for Russian firms appears to be the sanctions on Russia's dominant state-owned banks, which have had their access to Western capital market cut off. This will reduce liquidity and push up interest rates. "We estimate that interest rates for ruble debt have increased by 2% on average over the past two to three months," write S&P analysts. "Higher financing costs for Russian companies are the main result of the sanctions."

"Stepping back, the picture that emerges is one in which interest rates have increased and credit growth has slowed, with certain sectors, notably households and small and medium enterprises, hit particularly hard," says Neil Shearing of Capital Economics. "But there is no sign yet that a widespread credit crunch has infected the entire economy," he argues. Shearing, like most analysts, expects a tightening of credit conditions in coming month as the Russian central bank hikes interest rates.

Still there is no ground for Russian authorities to relax. Capital outflows fells significantly in the third quarter to $13bn, down from $24bn in the second quarter, but they still exceed the current account surplus of $11bn.  The accelerated slide in the value of the ruble points to an increase in capital outflows at the start of the fourth quarter, and the drop in the ruble will make year-end debt payments more difficult for a number of companies.  "The authorities will come under further pressure to dip into FX reserves to help the private sector meet these obligations," warns Shearing.

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