3/12/17: Russian and BRICS debt dynamics since 2012

Back in 2014, Russia entered a period of recessionary economic dynamics, coupled with the diminishing access to foreign debt markets. Ever since, I occasionally wrote about the positive impact of the economy's deleveraging from debt. Here is the latest evidence from the BIS on the subject, positing Russia in comparative to the rest of the BRICS economies:

In absolute terms, Russian deleveraging has been absolutely dramatic. Since 2014, the total amounts of debt outstanding against Russia have shrunk more than 50 percent. The deleveraging stage in the Russian economy actually started in 1Q 2014 (before Western sanctions) and the deleveraging dynamics have been the sharpest during 2014 (before the bulk of Western sanctions). This suggests that the two major drivers for deleveraging have been: economic growth slowdown (2013-1Q 2014) and economic recession (H2 2014-2016), plus devaluation of the ruble in late 2014 - early 2015.

The last chart on the right shows that deleveraging has impacted all BRICS (with exception of South Africa) starting in 2H 2013 - 1H 2014 (except for China, where deleveraging only lasted between 2H 2015 and through the end of 2016, although deleveraging was very sharp during that brief period).

In other words, there is very little evidence that any aspect of Russian debt dynamics had anything to do with the Western sanctions, and all the evidence to support the proposition that the deleveraging is organic to an economy going through the structural growth slowdown period.

23/12/15: Vnesheconombank: where things stay ugly

As reported by BOFIT, Russia’s 4th largest and state-owned Vnesheconombank  (VEB Group which technically is not a bank, but a development bank and an owner of a number of banks, so as such VEB is not subject to CBR supervision) requires estimated funding supports at EUR15–20 billion “to cover at least the next few years”.  Per Bloomberg, VEB has been seeking USD23 billion “to support long-term growth and pay off the upcoming loan” (data as of November 23). VEB total assets in Russia amount to ca EUR45 billion, which, per BOFIT, “would make VEB Russia’s fourth largest bank with holdings that correspond to about 4 % of the banking sector’s total assets”. Overall, VEB holds 2.8 trillion Rubles in loans assets and around 1 trillion Rubles in other assets.

To-date, VEB received EUR8 billion in deposits from the National Welfare Fund and about EUR500 million in other monies (most of which came from the Central Bank’s 2014 profits).

Per both, Bloomberg and BOFIT: VEB has been a major lender behind Sochi Winter Olympics 2014. New lending increased total loans held by the bank by some 25% in Ruble terms in 2013 before doubling loans in 2014. VEB started aggressive loans expansion in 2007 since when its assets base grew almost 10-fold. Over 2015, bank-held loans posted some serious deterioration in quality forcing bank to set aside significant reserves to cover potential losses. Per Reuters report, “S&P estimates some 500 billion roubles of VEB's loans were directed by the government and are therefore regarded as relatively risky. While the huge investments made in Sochi have generated public discussion in Russia, far less attention has been given to no less massive investments VEB made in Ukraine. "That's still on their books and they keep rolling those loans over. Of course it's only a question of time before they accept losses on those assets," said S&P's Vartapetov. In an interview in December 2013, VEB Chairman Vladimir Dmitriev said the bank had via Russian investors ploughed $8 billion into Ukrainian steel plants, mainly in the Donbass region, since ravaged in a separatist conflict. He said the investment had supported 40,000 Ukrainian workers, but did not say how the Russian economy had benefited.” Overall, Russian banks’ continued presence and even growth in Ukraine - while puzzling to some external observers - can be explained by the significant role these banks play in the Ukrainian economy.

In 2014, VEB posted full year loss of USD4.5 billion / RUB250 billion and in 1H 2015 losses totalled USD1.5 billion. VEB’s Ukrainian subsidiary was one of the big drivers for these. Based on the figures, VEB posted the largest loss of any Russian company in 2014.  The top three largest loss making companies in 2014 were: Vnesheconombank, followed by the steelmaking giant Mechel (loss of 167 billion rubles) and the monopoly Russian Railways (losses of 99 billion rubles).

In addition, VEB holds some USD19.3 billion of debt maturing through 2025 (see chart from Bloomberg) with EUR9 billion of this in eurobonds:

VEB is subject to both EU and US sanctions which effectively shut VEB access to funding markets and the bank will require between EUR2.5 and 3 billion for debt servicing in 2016 alone. This week, VEB secured a five-year loan of 10 billion yuan or EUR1.4 billion from China Development Bank.

Recently, Finance Minister Anton Siluanov stated that VEB requires as much as USD20 billion in funding (ca 1.7% of Russian GDP), and that VEB is expected to sell some of its assets to fund part of the gap.


Per Bloomberg, “the finance ministry’s proposals include exchanging the lender’s Eurobonds for Russian government securities, Vedomosti reported Nov. 24. Other options on the table include a local government bond offering for 1.5 trillion rubles to recapitalize the bank, and transferring bad assets from VEB’s balance sheet to the state, according to newspaper Kommersant.”

18/12/15: Ukraine Inches Even Closer to a Default

So, we have this:

Which means that Ukraine and Russia - so far - have failed to agree terms of debt restructuring. As a reminder, over the last few days, Ukraine and Russia were involved in a 'last minute' dialogue (via Germany) to resolve the issue.

Does this mean that Ukraine is now in a sovereign debt default? Technically - no. Ukraine will only be in a default after 10 days grace period expires, which means the parties to the talks still have 12 days to reach an agreement and avoid default.

Does this mean that Ukraine is now in breach of IMF lending criteria? Technically - no. IMF amended its own rules allowing lending to continue for countries in official sector default, as long as these countries continue to engage in debt restructuring negotiations with the lenders.

Can the two countries reach a deal in time to avoid official default? Unlikely: any deal between Russia and Ukraine (except for a deal that treats Russia under the same terms extended to private lenders - a deal that is simply unacceptable to Russia) will require approval of other (commercial) lenders under the agreement between commercial lenders and Ukraine struck earlier. There is simply not enough time to achieve such an approval, even assuming, there is a deal and the deal can be approved (both assumptions are quite a stretch).

Do both parties show will to negotiate in good faith? So far - no. Russian offer (see here) has been to restructure debt by extending repayment period (a real haircut absent nominal haircut, as far as I read this). The offer shifted Russian position in negotiations in the direction of Ukraine's position: from the opening position that the debt is official sector debt and thus should be repaid in full and in time. Ukraine's position has been to treat Russian debt equivalent to private sector debt and Ukraine (as far as public record goes) did not alter its position to move closer to Russian offer. Ukraine also deployed consistent rhetoric of "Our way or the highway" variety. In other words (I am willing to be corrected on this), Russia made insufficient step toward Ukraine, while Ukraine made no step toward Russian position whatsoever.

Note: my view has been (consistently over time) that Russia should restructure loans to Ukraine to a longer term, say 10-year, bond extended at original interest rate and allow for 2-3 years interest payments moratorium. Financially optimal solution would have been to impose a haircut on principal and extend maturity of the remaining balance. But, given Ukraine's failure to secure stronger restructuring with private sector lenders, this option is not available and is politically infeasible.

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.

21/2/15: Russian Sovereign Wealth Funds: 2015 drawdowns

In the previous note I covered Moody's downgrade of Russian sovereign debt rating (see http://trueeconomics.blogspot.ie/2015/02/21215-moodys-downgrade-russia-risks-and.html). Now, as promised, a quick note on Russian use of sovereign fund cash reserves (also referenced in the Moody's decision, although Moody's references are somewhat more dated, having been formulated around the end of January).

Back at the end of January, Russia’s sovereign wealth funds amounted to USD160 billion, with the Government primarily taking a historically-set approach (from 2003 onwards) of arms-length interactions with the Funds management. This relative non-interference marked 2014 and is now set to be changed, with the Government looking at using SWFs to provide some support for the investment that has been falling in 2013-2014 period and is likely to fall even further this year.

Fixed investment in Russia fell 2.0% y/y in 2013, and by another 3.7% in 2014. Private investment is likely to fall by double digits in 2015, based on the cost of funding, lack of access to international funding and general recession in the economy. It is likely to stay in negative growth territory through 2016.

Thus, last week, Prime Minister Medvedev signed an executive order deploying up to RUB500 billion from the Reserve Fund. The money will be used, notionally, to cover this year deficits (expected to hit 2% of GDP), thus protecting the state from the need to borrow from the markets. The Fund was originally set up precisely for this purpose - to finance deficits arising during recessionary periods. In other words, this is stabilisation-targeted use of stabilisation funds. The fund is fully accounted for in the total Forex reserves reported by the Central Bank. Latest figures for end of January 2015 showed the fund to have USD85 billion or RUB5,900 billion in its reserves, so this year allocation is a tiny, 8.5% fraction of the total fund. All funds are allocated into liquid, foreign currency-denominated assets.

The second use of SWFs is via the economic support programme that will draw up to RUB550 billion worth of funds in 2015 from the second SWF - the National Welfare Fund (NWF). Part of this funding is earmarked for banks capitalisation, ring fenced explicitly for banks providing funding to large infrastructure investments and lending for the enterprises. The use of the NWF funds is more controversial, because the Fund was set up to provide backing for future pensions liabilities, including statutory old-age pensions. However, the NWF has been used for the economic stimulus purposes before, namely in the 2009 crisis. Currently, NWF holds USD74 billion or RUB5,100 billion worth of assets. Liquid share of these assets, denominated in foreign currencies, is also included in the Central Bank-reported Forex reserves, but long-term allocated illiquid share and ruble-denominated assets are excluded from the CBR reported figures.

Now, per Moody's note issued last night, "The second driver for the downgrade of Russia's government bond rating to Ba1 is the expected further erosion of Russia's fiscal strength and foreign exchange buffers. …Taking at face value the government's plans to proceed with its planned fiscal consolidation for 2015, Moody's expects a consolidated government deficit of approximately RUB1.6 trillion (2% of GDP) as well as a widening of the non-oil deficit. The deficit would likely be financed by drawing on the Reserve Fund, which is specifically designed for circumstances when oil prices fall below budgeted levels. …Moreover, under the stress exerted by a shrinking economy, wider budget deficits and continued capital flight -- in part reflecting the impact of the Ukraine crisis on investor and depositor confidence -- and restricted access to international capital markets, Moody's expects that the central bank's and government's FX assets will likely decrease significantly again this year, cutting the sovereign's reserves by more than half compared to their year-end 2014 level of approximately USD330 billion. In a more adverse but not unimaginable scenario, which assumes smaller current account surpluses and substantially larger capital outflows than in Moody's baseline forecast, FX reserves including both government savings funds would be further depleted. While the government might choose to mobilise some form of capital controls to impede the outflow of capital and reserves, such tools are not without consequences. Capital controls, which might include a rationing of retail deposit withdrawals and/or prohibition upon repatriation of foreign investment capital, would weaken the investment climate further and undermine confidence in the banking system."

21/2/15: Moody's Downgrade: Russia Risks and Politics

Moody's downgraded Russian sovereign debt last night from Baa3 to Ba1 with negative outlook. Moody's put Russian ratings on a review back on January 16.

The bases for the downgrade were (quotes from Moody's statement):

1. "The continuing crisis in Ukraine and the recent oil price and exchange rate shocks will further undermine Russia's economic strength and medium-term growth prospects, despite the fiscal and monetary policy responses". In more specific terms, "Russia is expected to experience a deep recession in 2015 and a continued contraction in 2016. The decline in confidence is likely to constrain domestic demand and exacerbate the Russian economy's already chronic underinvestment. It is unlikely that the impact of recent events will be transitory. The crisis in Ukraine continues. While the fall in the oil price and the exchange rate have reversed somewhat since the start of the year, the impact on inflation, confidence and growth is likely to be sustained." As I noted on numerous occasions before, monetary policy environment remains highly challenging. Per Moody's "The monetary authorities face the conflicting objectives of keeping interest rates high enough to restrain the exchange rate and bring down inflation and keeping rates low enough to reinvigorate economic growth and bank solvency."
2. "The government's financial strength will diminish materially as a result of fiscal pressures and the continued erosion of Russia's foreign exchange (FX) reserves in light of ongoing capital outflows and restricted access to international capital markets." I will post a quick note on this matter later today, so stay tuned. Here's Moody's view: "Taking at face value the government's plans to proceed with its planned fiscal consolidation for 2015, Moody's expects a consolidated government deficit of approximately RUB1.6 trillion (2% of GDP) as well as a widening of the non-oil deficit. The deficit would likely be financed by drawing on the Reserve Fund, which is specifically designed for circumstances when oil prices fall below budgeted levels. Moody's also expects that widespread demands for fiscal easing are likely to emerge if, as the rating agency projects, the recession persists into 2016. In a scenario in which the government would turn to borrowing in the domestic market to finance at least a share of these deficits, higher spending could result in an increase of the debt-to-GDP ratio to 20% or more."
3. "The risk is rising, although still very low, that the international response to the military conflict in Ukraine triggers a decision by the Russian authorities that directly or indirectly undermines timely payments on external debt service." In other words, we are facing a political risk. Capital controls and debt repayment stops are two key risks here and these were visible for some time now, especially if you have followed my writing on the Russian crisis.

What's the driver for the negative outlook? Uncertainty. Per Moody's: "The negative outlook on the Ba1 rating reflects Moody's view that the balance of economic, financial and political risks in Russia is slanted to the downside, with scenarios incorporating either an escalation of the Ukraine crisis and/or damage caused by recent shocks being greater than in Moody's baseline scenario. Essentially, the probabilities associated with the downside scenarios are higher than those associated with an upside scenario in which the recession is shorter and shallower than Moody's baseline."


Conclusion: an ugly, but predictable move by Moody's. One can say part of it is down to rating agencies activism in trying to establish some sense of credibility post-Global Financial Crisis, whereby getting tougher on ratings is a major objective, and it is well-served by getting tougher on politically softer targets, like Russia. But one can equally argue that the ratings downgrade is consistent with economic environment and some longer-run fundamentals. My view would be is that we are seeing both, with the balance of impetus tilted toward the latter argument.

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.

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.

5/8/2014: Of Coming Russian Debt Showdown...

September and December 2014 are going to be crunch time for redemptions of Russian bonds, followed by 3rd and 4th quarters of 2015... All data below is in billions USD.

To the above: red bars = government debt issuance, pink = banks and blue = corporates.

And here is how Russian economy's dependence on external funding markets has grown over time:

Per above: red bars are state-owned banks external debt, pink bars are state-owned non-financial corporates, darker blue private banks, lighter blue private non-financial corporates.

All data sourced from RBKDaily which cites as sources Central Bank and Morgan Stanley Research.

The big question is how these maturities will be met, as EU and US are prohibiting issuance of any new debt in excess of 90-days duration...