Are There External Debt Service Problems For Russia?

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Summary

The recent shocks raised questions about the stability of the Russian external sector.

However, the external position looks solid.

External debt disbursement hides a deeper systemic risk.

On the 1st of April 2016, the total external debt of Russia was $516.1 billion, or about 44% of GDP. A staggering 92.1% of the debt is from the corporations and the banking sector; the rest is sovereign debt. The key trend for the last decade was significant decreasing of the external sovereign debt and considerable increasing of the external indebtedness of banks and corporations (See Figure 1,2).

Figure 1: The Russian Government External Debt, source: The Central Bank of the Russian Federation Click to enlarge

Figure 2: Total Russian External Debt, bln USD

(source: tradingeconomics.com) Click to enlarge

About 50 percent of the corporate and banking sector debt is the debt of the companies placed under sanctions. The sanctions hampered the ability of these businesses to refinance their debts. It raised questions about the stability of the Russian external sector. The currency crisis of late 2014 strengthened these fears because the sudden ruble depreciation coincided with significant payments of the state-owned oil company Rosneft (OTC:RNFTF) on the external debt.

The last year was difficult for external debt service. Total external debt payments exceeded $80 billion. However, even large payments have not affected the exchange rate. A number of other factors could explain the ruble shifts in 2015, such as oil prices.

Why are there no external stability risks? The plan for currency payments on external debt in the rest of 2016 is about $67.1 billion (both interest and principal payments). The schedule of the payments looks smooth (See Figure 3).

Figure 3: Russia external debt payment schedule in the rest of 2016 (source: The Central Bank of the Russian Federation) Click to enlarge

However, the most important thing is, there are enough sources of liquidity for these payments. According to the CBR statistics, there are about $54 billion of foreign currency deposits of non-government organizations, most (about 85%) have a term less than 30 days. These funds are held by corporations partially because of the demand to make payments on external debt. Corporations and banks that need to buy currency for servicing debt can use the second source of foreign currency liquidity. The second source is the reserves at the central bank. If there is a strong demand for foreign currency on the market, the central bank can use short-term instruments, such as repurchase agreements, to provide USD liquidity. The central bank is ready to use repurchase agreements with a total limit of $50 billion. Moreover, $17.5 billion of the total demand for foreign currency for external debt payments are liabilities of Russian companies to direct investors, according to the central bank's data. They could be restructured, if needed. Also, we have not considered that some part of the external debt actually could be refinanced.

As for the current account, it was in a surplus of $69.6 billion in 2015, while capital outflow was $58.1 billion. If these figures do not change dramatically in 2016, the central bank will not need to use reserves to fill the gap. However, even in a negative scenario, the central bank has enough reserves to intervene.

That means that the risks of shortage of liquidity are minimal. Referring to the external debt payments in 2016, head of the central bank, Elvira Nabiullina said:

"We don't see any risks here"

This means that external debt payments will have minimal effect on the ruble exchange rate while timely debt service will be a matter of creditworthiness of the issuer. Moreover, the overall trend of external debt accumulation is changing direction. It has contracted by almost 42% during 2014 and 2015. (See Figure 1).

However, this positive news is hiding a major risk which I have described in my previous article. The inability or unwillingness of Russian companies to refinance debts means they have to use their free cash flow to pay out current debts and to cut their investment programs. Total external debt disbursement in 2015 was about $85 billion, while the total net income of Russian companies was about $125 billion, according to the Minister of Economic Development Alexei Ulyukaev. Debt disbursement may take more than half of the corporate profits in Russia. It can have an adverse effect on investment and, as a consequence, on growth rates.

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