Corporate debt no longer Russia's Achilles heel

MOSCOW (Reuters) - Russian companies are facing repayments of over $100 billion this year on foreign debt borrowed to fund heady growth plans in the days of the global oil boom, but the biggest test of solvency may be behind them.

Of a total of $300 billion in external Russian corporate debt, analysts’ estimates on 2009 repayments range from $100 billion up to $130 billion.

Deutsche Bank’s Yaroslav Lissovolik estimates 2009 foreign corporate debt repayments at $120 billion and says repayments of $27 billion and $32 billion in the first and second quarter were still less daunting than the schedule of late 2008, in the heat of the crisis when oil prices were falling.

“We have gone through the most difficult wave of debt repayments. This wave uncovered the more vulnerable links in the equation that allowed the government to extend support,” Lissovolik said.

The risk remains that Russia’s monetary authorities and investors could again be blindsided by a wave of undisclosed debts or failure to refinance stopgap loans taken out in late 2008 to ward off default or margin calls.

“Foreign debt is a Pandora’s box. We say redemption volumes will be $80 billion in 2009, but it can be much bigger. All those covenants, clauses in debt deals -- we know very little about them,” a central bank source said.

Rapid economic growth and soaring oil prices provided cover as Russia’s corporate sector ramped up borrowing to fund expansion and seize merger opportunities. International lenders were eager accomplices, encouraged by strong cash flows.

“Simply put, in August Moscow was flooded with international bankers competing to provide funding to Russian entities,” Renaissance Capital said in its 2009 outlook, noting that Russia “does not have a debt problem, it has a solvency problem.”

“By October the only financiers visiting were those trying to get their money back.”

Russia went to war with Georgia in August and investors fled the stock market. The value of collateralized assets sank. Borrowers, forced to stump up to meet loan covenants, sold off more assets and sent Russian asset values into a downward spiral.

Standard & Poor’s credit analyst Elena Anankina said debt levels came as surprise because they were underestimated in official statistics, which excluded offshore debt secured by Russian assets.

“Oligarchs borrowed with collateral and the central bank did not catch it.”


Russia’s richest men, threatened with the loss of their core holdings, were forced to queue up at state banks as they doled out a $50 billion aid package financed out of Russia’s reserves.

Signs are that the government may try to nudge them back to the market before the next critical hour approaches.

“Clearly we are seeing that the government is starting to discover budget constraints, whether the central bank reserves or the fiscal reserves of the Finance Ministry,” Deutsche’s Lissovolik said.

“I certainly do expect that the scale of state support is likely to be cut back in the course of this year.”

There were other hidden dangers in the borrowing spree: a sharp decrease in the tenor of new borrowings and a pervasive belief that the rouble would rise on the back of oil revenue.

“We have paid a big portion of reserves for the gradual devaluation,” the central bank source said. “But we did it on purpose as we were keen to give business some time to get used to the new reality.”

One businessman, a beneficiary of stopgap funding from the state, said some of Russia’s industrialists, faced with cash calls, simply needed extra time to marshal scattered resources and would have no trouble repaying the government.

At the corporate level, many have dug in for the next round of debt redemptions, slashing capex programs and hoarding cash to meet repayments. Capital flight suggests some debt has been quietly retired or refinanced into rouble debt.

Renaissance estimated Russia’s debt-to-GDP ratio would fall to just over 40 percent by the end of 2009 from around 60 percent in the middle of 2008, when Russia began succumbing to global credit pressures.

“Russia saw a net outflow of $133 billion in Q4 2008 alone,” Tim Ash, CEEMEA head of research at Royal Bank of Scotland, said in a research note. “In some respects this is positive as it suggests that overall debt is being repaid, and leverage reduced.”

Additional reporting by Dmitry Zhdannikov and Antonina Vorobyova; Additional Research by Maria Grigoryeva and Evgenij Kovalev; Editing by Ian Jones