Russia's international repayment obligations overstated

By bne IntelliNews January 20, 2015

bne IntelliNews -


How much does Russia have to repay this year to international creditors? The question is key, as cut off from the international capital market by sanctions, the dollars leaving Russia to meet maturing corporate debt obligations are a major drain on the country's resources.

The official headline statistic puts the total amount of debt coming due in 2015 at $120bn, but economists believe that this number is overstated.

The problem is that some Russian companies report international debt that is actually their own money owed to themselves, as part of a mechanism to move money in and out of the country. The same is true with Russia's foreign direct investment (FDI), the lion's share of which comes from Cyprus, but is actually Russian flight capital returning when opportunity beckons.

Renaissance Capital tried to put a number on the amount real debt that Russian companies have to pay off this year and came up with $72bn.

Estimates for the amount of capital flight in 2014 are running at around $150bn, up from $63bn in 2013 before the clash with the West over Ukraine began. A large part of this increase in capital flight can be accounted for by corporates simply sending money aboard to pay off debts.

"The official headline statistics tells us $120bn, but we maintain our view that these numbers could be overstated by at least 40%. They include low-risk transactions within multinationals or between parent companies and subsidiaries, and Russian financing done through offshore vehicles and trade loans to China, which should not be repaid due to sanctions," Rencap said in a note. 

Another ameliorating factor is about a quarter of Russia's external debt is denominated in rubles, since the Russian government has been issuing ruble-denominated Eurobonds, which also reduces the strain on the country's reserves.

As a large part of capital flight is now companies paying off debt, Russia's external debt is expected to fall to $519bn as of the end of this year (38% GDP), compared to $594bn at the end of 2014 (32% GDP).

"In the other non-extreme scenarios, the outstanding amount of the Russian external debt might differ from $534bn (34% of GDP) to $492bn (47% of GDP), with oil prices at $80/bl and $40/bl, respectively," Rencap said in the note. "But our assumptions on external debt redemptions in these scenarios stay the same, and the difference is attributed to revaluation effects of the ruble-denominated part of the Russian external debt."

However, what actually happens to debt and debt repayment will depend heavily on what happens with financial sanctions on Russia. If they are lifted, then Russian corporates will rush to refinance debt, freeing resources to make domestic investments that will give the economy a shot in the arm. The EU sanctions are due to expire between March and June, but with fighting escalating in Eastern Ukraine in recent days and the government launching a fresh round of mobilisation, hopes for peace are fading fast, which suggests sanctions will remain in place for the rest of this year.

Loans from Asian markets might also provide some relief, but the amounts are still too small to significantly impact on the macro story.

The debt repayments will be made easier as Russian banks have built up significant reserves overseas.

"During the years of persistent capital flight, Russian banks have accumulated solid foreign assets, which are higher than their foreign liabilities. There are different estimates depending on methodology, but foreign assets of Russian banks exceeded their foreign liabilities by $70bn or $50bn as of the end of 2014 according to various CBR statistics and our estimates. So banks can cut their foreign assets to support external debt redemptions, as they did in 3Q14 bringing in $28bn to Russia," says Rencap. 

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