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Belarus hits EU with tit-for-tat sanctions
Belarusian police introduce colour-coded torture system for detained protesters
Kremlin publicly condemns Belarusian police brutality in hint of growing frustration with Lukashenko
Russian services PMI rises to 48.2, but remains underwater as recovery continues to slow
Russia to start mass vaccinations on December 7
Azerbaijan’s Aliyev calls on Armenia, Russia, Turkey and Iran to assist in creating Nakhchivan land corridor
FPRI BMB Russia: Sberbank releases a three-year transformation strategy to e-commerce concern
Ukraine’s banking sector continues recovery, but profits still lagging last year
Ukraine’s real wages up over 10% in October but have been stagnant in dollar terms for almost a year
FPRI BMB Ukraine: Public has confused opinions on resolving the Donbas conflict
Western Balkans plus Ukraine subsidised coal with over €900mn in 2018-2019
Estonian parcel robot firm Cleveron eyes €30mn state loan
Estonia’s chief auditor says €1bn in state COVID-19 loans issued haphazardly
Economic sentiment in CEE falls in November as recovery momentum splutters
Estonian animation studio Imepilt to hold IPO
Brighter days ahead: The economic bounce back in 2021
Central, Southeast Europe stock markets jump in anticipation of COVID-free future
VISEGRAD BLOG: An easing of trade tensions but still an uncertain situation for export-oriented Central Europe
Hungary's PM risks isolation as Poland mulls dropping EU budget veto
Poland ready to back down from veto of EU budget
Hungary's ruling party in damage control mode after MEP sex scandal bombshell
Poland’s PMI remains stuck just above the improvement line at 50.8 in November
Czech companies dominate this year’s Deloitte Technology Fast 50 CE
Coronacrisis to get worse before it gets better forecasts wiiw
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IMF says downside risks to Albanian economy are increasing
EU ministers fail to agree on launch of accession talks with Albania and North Macedonia
Western Balkans commit to green agenda and regional common market at Sofia summit
Bosnia’s opposition ousts nationalist parties in major cities
Bosnia’s main ethnic parties fight to hold onto power in local elections
Southeast Europe’s EU members to get biggest boost from next budget and recovery funds
Bulgaria imposes 3-week lockdown to slow down COVID-19 spread
CEE politicians highlight trade and security ties as they congratulate Biden
Breakaway Transnistria fully under Sheriff’s control as Obnovlenie party sweeps board in parliament election
Moldova’s presidential election is over, now the battle for the parliament begins
Moldova’s foreign policy reset
Russian establishment quick to congratulate Moldova's new president-elect
Rising COVID-19 cases put intense pressure on CEE healthcare systems
MEPs urge European Commission to act against Hungarian media financing in North Macedonia and Slovenia
North Macedonia mulls decriminalising cannabis to boost tourism
Retail surpass pre-crisis peak as Romanians shop instead of holiday
Romania’s stability election
Romanian venture capital firm Catalyst launches new €40mn-50mn fund for TMT
The state is back in business
Slovenian PM Jansa stands alongside Hungary and Poland in EU rule of law row
BEYOND THE BOSPORUS: Turkish number crunchers deliver November inflation surprise of 14%
Erdogan needs to go says analyst assessing Turkey’s economic collapse
Ukraine strikes deal with Turkey to produce killer drones instrumental in Karabakh conflict
In Karabakh deal, as many questions as answers
Protesters flood Yerevan demanding Armenia’s “traitor” PM quit over Nagorno-Karabakh surrender
Who emerge as the real winners from the bloody Nagorno-Karabakh conflict?
Below average 2020 wine production destined for volatile and uncertain global market
Iran calls on Saudis to limit $67bn defence spending to Tehran’s $10bn
Iranian prosecutors pledge to pursue Trump for Soleimani killing even after he leaves White House
No reaction from Kazakh elites as bombshell FT report says Nazarbayev’s son in law siphoned millions from pipeline scheme
UK court freezes $5bn in assets connected to fugitive Kazakh banker Ablyazov
Attack of the Debt Tsunami: global debt soars to a new all-time high
Kyrgyzstan's proposed new constitution provokes widespread revulsion
Kyrgyzstan's China debt: Between crowdfunding and austerity
CFC joins RWC in assessing KAZ Minerals buyout offer as under-valuation
China business briefing: Not happy with Kyrgyzstan
Mongolian coal exports to China paralysed as Beijing demands virus testing of truck drivers
Mongolia fears economic damage as country faces up to its first local transmissions of coronavirus
Mongolia in lockdown after suffering first local coronavirus transmissions
Mongolia’s wrestling culture: From the grasslands to the cage
No surprises in Tajikistan as Rahmon retains presidency with 91% of vote
A Tajikistan poised on verge of economic calamity set for vote
Tajikistan revives on-off dispute with Iran
Turkmenistan: The dammed united
Turkmenistan: Everybody yurts, sometimes
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Uzbekistan unveils extensive privatisation programme
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As the ruble crashed at the end of 2014 and Western sanctions hit some of Russia’s largest and most indebted firms, some analysts predicted the country was headed toward a credit crunch. In fact, Russia’s total stock of foreign debt actually fell by nearly 30% over the subsquent two years.
Although preliminary data showed the external debt stock rose slightly in the first quarter of 2016, the rapid but relatively painless decrease in Russia’s external debt burden is an unsung success story, especially for the Central Bank of Russia (CBR). Unlike many countries with large foreign borrowing, Russia’s problem was not external government debt, which totals just $30bn. As a share of GDP it is less than 16%, which is far less than most emerging markets, to say nothing of peripheral European countries.
Russia’s private sector, however, has borrowed heavily from foreigners, with the volume of external loans to Russia’s private sector growing from around $100bn in 2004 to $659bn by mid-2014. Nearly a third of this went to Russian banks, which had a profitable business for most of the last decade by borrowing money abroad at low interest rates, lending it within Russia at higher rates, and pocketing the spread.
The second major driver of external debt was Russia’s state-owned firms, especially those in the energy sector. Gazprom, for example, has over $22bn in outstanding bonds denominated in foreign currency, primarily in dollars and euros. Rosneft entered the current crisis having just spent $55bn buying TNK-BP in 2013, leaving it heavily levered.
In 2014, Rosneft faced the greatest difficulty in servicing its debt. According to Moody’s Investors Service, Rosneft had to repay or refinance $26.2bn between mid-2014 and the end of 2015. It had traditionally relied on Western investors to finance its expansion, and so long as oil prices were high, investors were happy to lend at low rates. But after sanctions were imposed on Russia, Western financial markets were closed off and Rosneft struggled to find other financing options. In the end, it refinanced only with help from the central bank, which agreed to accept newly-issued Rosneft bonds as collateral, allowing domestic Russian banks to buy the bonds. That manoeuvre took the pressure off Rosneft, though the lack of transparency spooked markets and drove down the ruble.
Energy companies were hard hit by the crisis, but they had one advantage over other firms: their production is priced in dollars, so they weren’t hit by the ruble’s devaluation from the end of 2014. Instead, they benefited from the cheaper ruble, which reduced the dollar value of their production costs. Russia’s banks, by contrast, were among the greatest losers from the devaluation. Their revenues are ruble denominated, so repaying foreign-currency denominated debt became more expensive in relative terms as the ruble fell to half its previous value against the dollar. The devaluation also hit bank profits by placing pressure on their clients’ ability to repay loans, further squeezing profits. On top of this, several of the biggest banks were placed under Western sanctions.
This is one reason that banks have led the way in paying down their external debt. Banking sector external borrowing has decreased by 38% since 2014, down to $129bn. External debt owed by non-financial firms is down by over $100bn since 2014, a decrease of nearly 20%.
How did Russia manage to deleverage so rapidly without a credit crunch? One key reason was the country’s central bank, which ensured that credit was available to reputable borrowers. In November 2014 the CBR introduced its 12-month repo programme, which provided year-long dollar loans to Russia’s banks. That gave banks the ability to refinance dollar-denominated debt, crucial if Russia’s banking system was to replace external sources of lending to Russian firms. Several Russian banks, such as Otkritie, have expanded over the past two years by taking advantage of this business.
Not all the steps that Russia’s government took to deal with the liquidity crisis were positive. The 2014 Rosneft transaction stands out as particularly poorly designed, though the central bank likely came under political pressure to do the deal. Overall, though, the CBR has taken steps to limit the potential downside of its liquidity provision. The main risk to this type of programme is that the central bank is left holding obligations from banks that go bust. CBR governor Elvira Nabiullina, however, has coupled expanded liquidity with an aggressive campaign to shut down poorly managed banks, thereby limiting the chance that Russian taxpayers will be on the hook for bad debts.
The decline in external debt is not, of course, all good news. In the past, rapid influxes of foreign capital were evidence that investors expected significant growth. Today, reduced borrowing and lending is a sign that both Russians and foreigners lack confidence in Russia’s prospects. But the rapid fall in Russia’s external debt burden could have been much worse had it not been for the central bank’s efforts. Rarely do countries deleverage so rapidly with so little financial chaos.
Chris Miller is Associate Director of the Program in Grand Strategy at Yale University. Follow him on twitter @crmiller1
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