2/2/15: Russian External Debt: Falling & So Far Sustainable

BOFIT published an update on Russian external debt as of the end of December 2014. The update shows the extent of debt deleveraging forced onto Russian banks and companies by the sanctions.

In H2 2014, repayments of external debt accelerated.

Banks cut their external debt by USD43 billion to USD171 billion over the year, with much of the reduction coming on foot of two factors: repayment of maturing debt and ruble devaluations. Ruble devaluations - yes, the ones that supposed to topple Kremlin regime - actually contribute to reducing Russian external debt. Some 15% of banks' external debts are denominated in Rubles.

Corproate external debt fell by USD60 billion to USD376 billion, with Ruble devaluation accounting for the largest share of debt decline, as about 25% of all external corporate debt is denominated in Rubles.

So do the maths: Ruble devaluations accounted for some USD16 billion drop in banks debts, and some USD54 billion in corporate debt in 2014 (rough figures as these ignore maturity of debt composition and timing).

Additional point, raised on a number of occasions on this blog, is that about 1/3 of corporate debt consists of debt cross-held within corporate groups (loans from foreign-registered parent companies to their subsidiaries and vice versa).

All in, end-2014 external debt of Russian Government, banks and corporates stood at USD548 billion, or just below 30% of GDP - a number that, under normal circumstances would make Russian economy one of the least indebted economies in the world. Accounting for cross-firm holdings of debt, actual Russian external debt is around USD420 billion, or closer to 23% of GDP.


CBR latest data (October 2014) puts debt maturity schedule at USD108 billion in principal and USD20 billion in interest over 2015 for banks and corporates alone. Of this, USD37 billion in principal is due from the banks, and USD71 billion due from the corporates. Taking into the account corporates cross-holdings of debt within the enterprise groups, corporate external debt maturing in 2015 will amount to around USD48 billion. Against this, short-term banks' and corporate deposits in foreign currency stand at around USD120 billion (figures from October 2014).

In other words, Russian banks and companies have sufficient cover to offset maturing liabilities in 2015, once we take into the account the large share of external debts that are cross-held by enterprise groups (these debts can be easily rolled over). Of course, the composition of deposits holdings is not identical to composition of liabilities, so this is an aggregate case, with some enterprises and banks likely to face the need for borrowing from the CBR / State to cover this year's liabilities.

BOFIT chart summarising:

24/11/2014: External Debt Maturity Profile: Russia H1 2015-H1 2016

I covered recently Russian capital outflows data (see here: http://trueeconomics.blogspot.ru/2014/11/23112014-russian-economy-capital.html). 

Now, lets take a look at the data for External Debt maturity profile for the economy. The reason for why this is of importance is that currently Russian enterprises and banks (even those not covered by the sanctions) have effectively no access to dollar and euro funding in international markets, making it virtually impossible for them to roll maturing debts. 

Chart below shows the quantum of debt maturing over the 18 months between January 2015 and through June 2016. The total amount of maturing external debt to be funded by Russian state, banks and enterprises is USD138.796 billion. 

Of this, just USD4.03 billion is Government debt (or just 2.9% of the total maturing debt). Which pretty much means there is no public debt sustainability issue in sight as the result of the sanctions no matter what debt ratings are issued to the sovereign.

A third of total external debt coming due in H1 2015 through H1 2016 is banks debt (33.6% of the total) amounting to USD46.627 billion. There is a steep curve on banks funding requirements in H1 2015 at USD20.646 billion, scaling down to USD15.19 billion in H2 2015 and to USD10.791 billion in H1 2016. All of these relate to either loans or maturing deposits, with zero exposure to debt securities. Much of it is, therefore, down to interbank lending markets.

Almost two thirds of external debt coming due over the next 18 months is Non-financial Corporate loans (USD65.311 billion or 63.5% of the total). This excludes debt liabilities to direct investors which add additional USD21.245 billion to the above total for the sector and the above total maturing debt. However, as it is written against the equity holders, these debts can be restructured separately from the direct and intermediated debts. Again, H1 2015 represents the highest burden on debt rollover/repayment with USD25.41 billion of loans maturing. This declines to USD21.1 billion in H2 2015 and to USD18.8 billion in H1 2016.

Chart below summarises:

So to summarise, Russia is facing steep repayment schedule on non-Governmental debt in H1 2015, declining in H2 2015, with even more benign demand in H1 2016.  While Russian Central Bank has funds to cover the above volumes of redemptions, even allowing for adjustments to the funds for liquidity risk, the quantum of debt maturing in the next 18 months is high and will require some significant strain on cash flows of the enterprises and possibly significant injections of funding from the state.

The obvious question is: how much equity will migrate from private ownership to state ownership in the latter case.