10/4/19: Russian Foreign Exchange Reserves and External Debt

As recently posted by me on Twitter, here are three charts showing the evolution of Russian foreign reserves and external debt:

Remember the incessant meme in the Western media about Russia eminently in danger of running out of sovereign wealth funds back at the start of the Western sanctions in late 2014? Well, the chart above puts that to rest. It turns out, Russia did not run out of the reserves, and instead quite prudentially used funds available to carefully support some economic adjustments (especially in agriculture and food sector), while simultaneously balancing out its fiscal deficits.

Do note that the reserves above exclude over USD 91 billion worth of Gold that Russia holds and continues to buy at rising clips.

The result of the prudentially balanced management of the reserves and the economy was deleveraging out of debt (a lot of this was done via restructuring of intracompany loans and affiliated enterprises refinancing), with a reduction in the external debt (chart below), without use of sovereign funds:

As of current, Russian foreign exchange reserves ex-gold are more than sufficient to cover the entirety of the country public and private sectors external debts.

If the above chart is not dramatic enough, here is a contrasting experience over the same years for the U.S. economy:

Nothing that CNN and the rest of the Western media pack ever managed to capture.

10/2/16: Slon.ru: "Чем хуже, тем лучше"

My latest column “Чем хуже, тем лучше. Откуда у российской экономики все больше сил“ for Slon.ru is out at https://slon.ru/posts/63670 in Russian.

This time, I am covering the topic of how Russian economy deleveraging leads to a future uplift in its potential growth, before tackling the cost of such deleveraging that is driving Russian public opinion of policies and direction of the State in a follow up column.

26/1/16: Russian External Debt: Deleveraging Goes On

In previous post, I covered the drawdowns on Russian SWFs over 2015. As promised, here is the capital outflows / debt redemptions part of the equation.

The latest data for changes in the composition of External Debt of the Russian Federation that we have dates back to the end of 2Q 2015. We also have projections of maturities of debt forward, allowing us to estimate - based on schedule - debt redemptions through 4Q 2015. Chart below illustrates the trend.

As shown in the chart above, based on estimated schedule of repayments, by the end of 2015, Russia total external debt has declined by some USD177.1 billion or 24 percent. Some of this was converted into equity and domestic debt, and some (3Q-4Q maturities) would have been rolled over. Still, that is a sizeable chunk of external debt gone - a very rapid rate of economy’s deleveraging.

Compositionally, a bulk of this came from the ‘Other Sectors’, but in percentage terms, the largest decline has been in the General Government category, where the decline y/y was 36 percent.

Looking at forward schedule of maturities, the following chart highlights the overall trend decline in debt redemptions coming forward in 2016 and into 2Q 2017.

Again, the largest burden of debt redemptions falls onto ‘Other Sectors’ - excluding Government, Central Bank and Banks.

The total quantum of debt due to mature in 2016 is USD76.58 billion, of which Government debt maturing amounts to just 1.7 billion, banks debts maturing account for USD19.27 billion and the balance is due to mature for ‘Other Sectors’.

These are aggregates, so they include debt owed to parent entities, debt owed to direct investors, debt convertible into equity, debt written by banks affiliated with corporates, etc. In other words, a large chunk of this debt is not really under any pressure of repayment. General estimates put such debt at around 20-25 percent of the total debt due in the Banking and Other sectors. If we take a partial adjustment for this, netting out ‘Other Sectors’ external debt held by Investment enterprises and in form of Trade Credit and Financial Leases, etc, then total debt maturing in 2016 per schedule falls to, roughly, USD 59.5 billion - well shy of the aggregate total officially reported as USD 76.58 billion.


So in a summary: Russian deleveraging continued strongly in 2015 and will be ongoing still in 2016. 2016 levels of debt redemptions across all sectors of the economy are shallower than in 2015. Although this rate of deleveraging does present significant challenges to the economy from the point of view of funds available for investment and to support operations, overall deleveraging process is, in effect, itself an investment into future capacity of companies and banks to raise funding. The main impediment to the re-starting of this process, however, is the geopolitical environment of sanctions against Russian banks that de facto closed access to external funding for the vast majority of sanctioned and non-sanctioned enterprises and banks.


Next, I will be covering Russian capital outflows, so stay tuned of that.

28/10/15: Russian Economy Update: Consumption and Debt

Updating Russian stats: September consumption and deleveraging: bigger clouds, brighter silver lining. 

In basic terms, as reported by BOFIT, per Rosstat, Russian seasonally-adjusted retail sales (by volume) fell more than 10% y/y in September, with non-food sales driving the figure deeper into the red. On the ‘upside’, services sales to households fell less than overall retail sales. This accelerates the rate of decline in household consumption expenditure - over 1H 2015, expenditure fell just under 9% y/y. Small silver lining to this cloud is that household debt continued to decline as Russian households withdrew from the credit markets and focused on increased savings (most likely precautionary savings).

Russian households are not the only ones that are saving. Overall external debt of the Russian Federation fell, again, in 3Q 2015, with preliminary data from the Central Bank of Russia figures putting total foreign debt at USD522bn as of end-September, down just over USD30bn compared to 2Q 2015. Per official estimates, ca 50 percent of the overall reduction q/q in external debt came from repayment of credit due, while the other 50 percent was down to devaluation of the ruble (ca 20 percent of Russian external debt was issued in Rubles).

Overall, 3Q 2015 saw some USD40 billion of external debt maturing, which means that over 1/4 of that debt was rolled over by the non-bank corporations. Per CBR estimates, ca 40% of the external debt owed by the Russian non-bank corporations relates to intragroup loans - basically debt owed across subsidiaries of the same percent entity. And over recent quarters, this type of debt has been increasing as the proportion of total debt, most likely reflecting two sub-trends:
1) increasing refinancing of inter-group loans using intra-group funds; and
2) increasing conversion of intra-group investments/equity into intragroup debt (and/or some conversion of FDI equity into intra-group debt).

Over the next 12 months (from the start of 4Q 2015), Russian foreign debt maturity profile covers USD87 billion in maturing obligations against country currency reserves of USD370 billion-odd. As noted by BOFIT, “A common rule-of-thumb suggests that a country’s reserves need to be sufficient to cover at least 100% of its short-term foreign debt to avoid liquidity problems.” Russia’s current cover is closer to 430%. And that is absent further ruble devaluations.

A chart via BOFIT:

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.

3/8/15: IMF on Russian Economy: Debt Sustainability

In the previous post, I covered IMF latest analysis of Russian GDP growth. Here, another key theme from the IMF Article IV report on Russia: fiscal policy sustainability.

In its latest assessment of the Russian economy, IMF has reduced its forecast for General Government deficit for 2015, from -3.69% of GDP back in April 2015 to -3.3% of GDP in the latest report. However, in line with new Budgetary framework, the IMF revised its forecasts for 2016-2020 deficits to show poorer fiscal performance:

In line with worsening deficits from 2016 on, IMF is also projecting higher government debt (gross debt, inclusive of state guarantees):

Still, the IMF appears to be quite happy with the overall debt and fiscal sustainability over the short run and is taking a view that over the next 2-3 years, fiscal policy must provide some upside supports to investment.

One of the reasons for this is that IMF sees continued strong buffers on fiscal reserves side into 2020, with Gross international reserves of USD362.4 billion and 374.8 billion in 2015-2016 amounting to 13.6 months of imports and providing cover for 496% and 281% of short term debt, respectively.

Furthermore, IMF expects debt levels to remain benign, both in terms of Government debt and Private sector debt as the chart above shows.

Note: I will cover Private Sector Debt developments in a separate post, so stay tuned.

Overall, 

1) External debt situation remains positive and is improving in the sector with weaker performance (corporate sector):

Note: above figures do not net out debt written to Russian banks and corporates by their parent and subsidiary entities located outside Russia, as well as direct investment / equity -linked debt.

2) "...no sector shows maturity risk with short-term assets exceeding short-term debt in aggregate"

3) Fiscal stance appears to be expansionary, but moderate, with deficits below 4% of GDP forecast for the worst performance year of 2016.

4) "Exchange rate and liquidity risks are mitigated by the CBR's large reserve level"

Stay tuned for more analysis, including debt positions across various sectors.

1/5/15: Russian Economy: Latest Forecasts and Debates

Russian economy has been surprising to the upside in recent months, although that assessment is conditioned heavily by the fact that 'upside' really means lower rate (than expected) of economic decline and stabilised oil prices at above USD55 pb threshold. On the former front, 1Q 2015 decline in real GDP is now estimated at 2.2% y/y - well below -3% official forecast (reiterated as recently as on April 1) and -2.8% contraction forecast just last week, and -4.05% consensus forecast for FY 2015. It is worth noting that contraction in GDP did accelerate between February (-1.2% y/y) and March (-3.4% y/y). 2Q 2015 forecast remains at -3%.

In line with this, there have been some optimistic revisions to the official forecasts. Russian economy ministry has produced yet another (fourth in just two months) forecast with expected GDP decline of 2.8% this year. Crucially, even 2.8% decline forecast figure still assumes oil price of USD50 pb. Similarly, the Economy Ministry latest forecast for 2016 continues to assume oil at USD60 pb, but now estimates 2016 GDP growth at +2.3%

These are central estimates absent added stimulus. In recent weeks, Russian Government has been working on estimating possible impact of using up to 80% of the National Welfare Fund reserves to boost domestic infrastructure investment. This is expected to form the 3 year action plan to support economic growth that is expected to raise domestic investment to 22-24% of GDP by 2020 from current 18%. The objective is to push Russian growth toward 3.5-4% mark by 2018, while increasing reliance on private enterprise investment and entrepreneurship to drive this growth.

An in line with this (investment) objective, the CBR cut its key rate this week by 150bps to 12.5%. My expectation is that we will see rates at around 10%-10.5% before the end of 2015. From CBR's statement: "According to Bank of Russia estimates, as of 27 April, annual consumer price growth rate stood at 16.5%. High rates of annual inflation are conditioned primarily by short-term factors: ruble depreciation in late 2014 — January 2015 and external trade restrictions. Meanwhile, monthly consumer price growth is estimated to have declined on the average to 1.0% in March-April from 3.1% in January-February, and annual inflation tends to stabilise. Lower consumer demand amid contracting real income and ruble appreciation in the recent months curbed prices. Inflation expectations of the population decreased against this backdrop. Current monetary conditions also facilitate the slowdown in consumer price growth. Money supply (M2) growth rate remains low. Lending and deposit rates are adjusted downwards under the influence of previous Bank of Russia decisions to reduce the key rate. However, they remain high, on the one hand, contributing to attractiveness of ruble savings, and, on the other hand, alongside with tighter borrower and collateral requirements, resulting in lower annual lending growth."

There is an interesting discussion about the ongoing strengthening in Russian economic outlook here: https://fortune.com/2015/04/29/russia-economy-resilience/. Here's an interesting point: "Russian-born investment banker Ruben Vardanyan pointed out that the collapse of the ruble left much of the economy untouched, with roughly 90% of the population not inclined to buy imported goods. And that population, Vardanyan points out, has only increased its support for Vladimir Putin in the months following the imposition of sanctions." I am not so sure about 90% not inclined to buy imports, but one thing Vardanyan is right about is that imports substitution is growing and this has brought some good news for producers in the short run, whilst supporting the case for raising investment in the medium term.


Meanwhile, The Economist does a reality check on bullish view of the Russian economy: http://www.economist.com/news/finance-and-economics/21650188-dont-mistake-stronger-rouble-russian-economic-recovery-worst-yet.

The Economist is right on some points, but, sadly, they miss a major one when they are talking about the pressures from USD100bn of external debt maturing in 2015.

Here is why.

Russia's public and private sector foreign debt that will mature in the rest of this year (see details here: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html) does not really amount to USD 100bn.

Foreign currency-denominated debt maturing in May-December 2015 amounts to USD68.8 billion and the balance to the USD100bn is Ruble-denominated debt which represents no significant challenge in funding. Of the USD68.8 billion of foreign exchange debt maturing, only USD2.01 billion is Government debt. Do note - USD611 million of this is old USSR-time debt.

Corporate liabilities maturing in May-December 2015 amounts to USD45.43 billion. Of which USD12.46 billion are liabilities to direct investors and can be easily rolled over. Some USD963 million of the remainder is various trade credits and leases. Also, should the crunch come back, extendable and cross-referenced. Which leaves USD32.07 billion of corporate debt redeemable. Some 20% of the total corporate debt is inter-company debt, which means that - roughly-speaking - the real corporate debt that will have to be rolled over or redeemed in the remaining months of 2015 is around USD26-27 billion. Add to this that Russian companies have been able to roll over debt in the markets recently and there is an ongoing mini-boom in Russian corporate debt and equity, and one can be pretty much certain that the overall net burden on foreign exchange reserves from maturing corporate debt is going to be manageable.

The balance of debt maturing in May-December 2015 involves banks liabilities. All are loans and deposits (except for demand deposits) including debt liabilities to direct investors and to direct investment enterprises. Which means that around 25-33% of the total banks liabilities USD26.57 billion maturing is cross-referenced to group-related debts and investor-related liabilities. Again, should a crunch come, these can be rolled over internally. The balance of USD19.9 billion will have to be funded.

So let's take in the panic USD100 billion of foreign debt claimed to be still maturing in 2015 and recognise that less than USD50 billion of that is likely to be a potential (and I stress, potential) drain on Russian foreign exchange reserves. All of a sudden, panicked references in the likes of The Economist become much less panicked.

Meanwhile, Russian economy continues to post current account surpluses, and as imports continue to shrink, Russian producers' margins are getting stronger just as their balance sheets get healthier (due to some debt redemptions). It's a tough process - deleveraging the economy against adverse headwinds - but it is hardly a calamity. And The Economist, were it to shed its usual anti-Russian biases, would know as much.

That said, significant risks remain, which means that a prudent view of the Russian economy should be somewhere between The Economist's scare crow and the Fortune's and the Economy Ministry's cheerleading. Shall we say to expect, on foot of current data and outlook, the 2015 GDP growth to come in at -3.5-4%, with 2016 economic growth to come in at +1.5-2%?

14/4/15: Russian external Debt Redemptions: Q1 2015 - Q3 2016

With Q1 out of the way, Russia passed a significant milestone in terms of 2015 external debt redemptions.

In total USD36.647 billion of external debt matured in Q1 2015, the highest peak for the period of Q1 2015 - Q3 2016. Even controlling for inter-company loans and equity positions, the figure was around USD24 billion for Q1 2015, again, the highest for the entire 2015 and the first three quarters of 2016.

Here is the breakdown of maturing external debts:

All in, over the last 3 quarters alone, Russia has managed to repay and roll over USD156.23 billion worth of external debt, with net repayment estimated at around USD96.5 billion.

Painful in the short run, this is not exactly weakening Russian economy in terms of forward debt/GDP and other debt-linked ratios.

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:

23/12/2014: A Simple Math: Russian Default or Not

A simple math:

• Russia's total external debt, stripping out cross-holdings of corporate entities and banks (debt owed by Russian subsidiaries to foreign parents, debt owed by Russian companies to Russian investment vehicles registered off-shore, debt owed by Russian JVs to foreign partners, etc) is around USD500 and USD600 billion, based on various estimates. Note: official estimates put gross external debt in foreign currency at USD540 billion at Q2 2014, of which we can net out around 15 percent for cross-holdings by (ultimately) Russian entities, implying gross external foreign currency-denominated debt net of cross holdings at ca USD460 billion.
• Of this, roughly USD101 billion matures in 2015
• Russian GDP is slightly over USD2 trillion
• Thus, total external debt of Russian companies, households and the Government net of cross-holdings amounts to 25-30% of its GDP.  By World Bank data referencing this runs at around USD23% of GDP.
• By the end of 2015, if the repayments take place, and factoring in dim sum new debt issuance, it will be around 22-27% of GDP or by World Bank methodology - around 20% of GDP.

By the above, Russian economy is nowhere near any significant risk of defaults, save for the risk of default induced solely by two forces (should they continue on the current trend):

1. Oil price collapse, now increasingly looking as being caused by the combination of shale output surge and Saudi Arabia's response to that, and
2. Western sanctions that effectively imposed external capital controls of extreme severity on Russian economy.

You can blame President Putin for many things, and rightly so. But for any, even nascent capital controls Russia imposes (I will post my thoughts on these in a couple of hours, once my comment to a journalist goes to print) you really should blame President Obama & the House of Saud.

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.