15/8/15: Russian External Debt: Big Deleveraging, Smaller Future Pressures

Readers of this blog would have noted that in the past I referenced Russian companies cross-holdings of own debt in adjusting some of the external debt statistics for Russia. As I explained before, large share of the external debt owed by banks and companies is loans and other debt instruments issued by their parents and subsidiaries and direct equity investors - in other words, it is debt that can be easily rolled over or cross-cancelled within the company accounts.

This week, Central Bank of Russia did the same when it produced new estimate for external debt maturing in September-December 2015. The CBR excluded “intra-group operations” and the new estimate is based on past debt-servicing trends and a survey of 30 largest companies.

As the result of revisions, CBR now estimates that external debt coming due for Russian banks and non-financial corporations will be around USD35 billion, down on previously estimated USD61 billion.

CBR also estimated cash and liquid foreign assets holdings of Russian banks and non-bank corporations at USD135 billion on top of USD20 billion current account surplus due (assuming oil at USD40 pb) and USD14 billion of CBR own funds available for forex repo lending.

Here are the most recent charts for Russian external debt maturity, excluding most recent update for corporate and banks debt:

As the above table shows, in 12 months through June 2015, Russian Total External Debt fell 24%, down USD176.6 billion - much of it due to devaluation of the ruble and repayments of maturing debt. Of this, Government debt is down USD22.1 billion or 39% - a huge drop. Banks managed to deleverage out of USD59.9 billion in 12 months through June 2015 (down 29%) and Other Sectors external liabilities were down USD88.8 billion (-20%).

These are absolutely massive figures indicating:
1) One of the underlying causes of the ongoing economic recession (contracting credit supply and debt repayments drag on investment and consumer credit);
2) Strengthening of corporate and banks' balance sheets; and
3) Overall longer term improvement in Russian debt exposures.

3/8/15: IMF on Russian Economy: Private Sector Debt

Continuing with IMF analysis of the Russian economy, recall that
- The first post here covered GDP growth projections (upgraded)
- External Debt and Fiscal positions (a mixed bag with broadly positive supports but weaker longer-term sustainability issues relating to deficits).

This time around, let's take a look at IMF analysis of Private Sector Debt.

As IMF notes, economic crisis is weighing pretty heavily on banks' Non-performing Loans:

In part, the above is down to hefty write downs taken by the banks on Ukrainian assets (Russian banks were some of the largest lenders to Ukraine in the past) both in corporate and household sectors.

However, thanks to deleveraging (primarily in the corporate sector, due to sanctions, and some in household sector, due to economic conditions), Loan to Deposits ratio is on the declining trajectory:

Note: Here is a chart on deleveraging of the corporate sector and for Russian banks:

In line with changes in demand for debt redemptions, FX rates, as well as due to some supports from the Federal Government, banks' exposure to Central Bank funding lines has moderated from the crisis peak, though it remains highly elevated:

Illustrating the severity of sanctions, corporate funding from external lenders and markets has been nil:

And Gross External Debt is falling (deleveraging) on foot of cut-off markets and increased borrowing costs:

So companies are heading into domestic markets to borrow (banks - first chart below, bonds - second chart below):

Net:

1) Corporate external debt is falling:

2) Household debt is already low:

3) But the problem is that deleveraging under sanctions is coinciding with economic contraction (primarily driven by lower oil prices), which means that Government reserve funds (while still sufficient) are not being replenished. IMF correctly sees this as a long term problem:

So top of the line conclusion here is that banking sector remains highly pressured by sanctions and falling profitability, as well as rising NPLs. Credit issuance is supported not by new capital formation (investment) but by corporates switching away from foreign debt toward domestic debt. Deleveraging, while long-term positive, is painful for the economy. While the system buffers remain sufficient for now, long term, Russia will require serious changes to fiscal rules to strengthen its reserves buffers over time.

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:

16/1/2015: Moody's Get Double Moody on Russia

As I predicted at a briefing earlier today, Moody's downgraded Russia's sovereign debt (expect downgrades of banks and corporates to follow in due course). This was inevitable given the outlook for growth 'dropped down' on us by the agency in their note on Armenia (see here).

Full release on downgrade is here: https://www.moodys.com/research/Moodys-downgrades-Russias-government-bond-rating-to-Baa3-on-review--PR_316487.

The point is - if you believe Moody's outlook for the risks faced by the economy - you should expect full, open (as opposed to partial and 'voluntary') capital controls and debt repayments holidays (for corporate and banks' debts for entities directly covered by sanctions) before the end of the year.

And, you should still expect a good 75%+ chance of a further downgrade upon the review as Moody's struggle to push ahead with projecting a more 'robust ratings' stance to the markets.

Even the best case scenario is for another downgrade and 12-18 months window of no positive reviews.

The impact of these downgrades is narrow, however. Russian Government is unlikely to become heavily dependent on new debt issuance and thus is relatively well insulated against the fall out from the secondary bond market yields spikes. Russian banks can withstand paper losses on sovereign bonds they hold. At any rate they have much greater headaches than these - if oil prices follow Moody's chartered course, who cares what sovereign ratings are assigned. The impact of sovereign ratings and yields on private debt issuance is a bit more painful, as it will hit those entities issuing new debt in dim sum markets, but again, the overall impact is secondary to the bigger issues of sanctions and the freezing of the debt markets for Russian entities.

On the other hand, were the downgrades and markets reaction to push Russians over the line into direct capital controls and suspension of debt redemptions and servicing for entities affected by the sanctions, the impact on Western debt holders will be painful. And the sovereign deficits and debt positions will be fully covered by sovereign reserves.

So the more real the Moody's risks prognosis becomes, the more pain will be exported from Russia our way.