More evidence that Russia’s external debt problem is overstated

This article from “The Moscow Times” (MT) confirms my previous analysis: it is very likely that Russia’s external debt load is overstated. This is because many oligarchs fund their Russian operating entities via offshore holdings that are treated as foreign investors/creditors from a national account perspective.

About the likely dimension of these flows, I wrote the following,

Obviously, we can only guess about the true size of this phenomenon, but I think it is safe to assume that these types of flows are material. Moreover, if the proportion of these types of flows really amount 50 percent of external debt, as some analysts suggest, then it is reasonable to assume that the proportion is even higher for the direct equity flows. For instance, retained earnings of a Russian commodity producer held via a Cypriot holding would show up here. In order to put a figure on my thoughts, I will simply postulate that 50% of the direct investment flows mentioned above, i.e. about USD 235 billion, are not truly foreign claims on Russia, but claims by Russians disguised as foreign claims. Obviously, this is not very scientific, but it helps puts things into perspective.

And now the MT provides some recent figures on debt redemptions,

According to Central Bank data, Russian companies and banks need to repay $109 billion in foreign debt in 2015, a heavy burden at a time when low oil prices have sunk export earnings and Western sanctions have stemmed capital inflows. These sanctions are widely believed to prevent companies from refinancing foreign debts by taking out new foreign loans. But official figures tell a surprisingly different story. Last year, net private sector debt repayments amounted to around $40 billion, or less than half of the $100 billion that the Central Bank said fell due, implying the rest was refinanced or rescheduled. Even in the fourth quarter, after Western sanctions were tightened, the size of net redemptions was only around half of debts falling due.

That suggests that many “foreign” debts are really debts to fellow Russians operating from offshore.

Aha, actual repayments were 40 percent of the CBRs estimate. And I would like to emphasize that the ratio held up even during the last quarter when sanctions were already biting.

Clearly, the fact that not all redemptions had to be met could also be due to the fact that Russian banks, i.e. not the owners themselves, decided to roll over USD funding. This would be a feasible strategy, given that we know many Russians converted RUB deposits into USD deposits during Q4 thereby improving FX-funding for the banking sector (and lowering the RUB).

Conclusion

It is my opinion that Russia’s economy could even handle the entire official external debt load (USD 600bn-700bn), since most debtors earn in USD anyway and margins are likely to remain stable due to the RUB fall. Most corporates I’ve looked at so far, with the exception of Rosneft, are not overly levered and have wisely chosen to fund themselves at medium term maturities. This should give them enough time to earn the USD they need without resorting to refinancing.

However, I think the “true” debt load is far lower, since there is compelling evidence that a sizeable chunk of this external debt represents in effect equity financing, mitigating the refinancing problem.

(Disclosure: long RUB and select Russian bonds and stocks)

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One comment

  1. interesting write! due to similar reasons i was long the Ruble from 70 down to 63 until last week. still the Ukrainian crisis still makes me nervous.

    good read on Russia´s oil sector (and how it´s not struggeling as many might think): http://www.cnbc.com/id/102424564

    “…Mamedov noted that at $110 oil and 33 rubles to the U.S. dollar, Russian upstream free cash flow for the companies his group covered was roughly the same as now, with oil near $60 and 60 rubles per U.S. dollar…”

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