Russia Looking Haggard But Default Risks Low For Now

Fears are growing that Russia could face a dollar liquidity crunch if sanctions remain in force, though in the short term the default risk is limited given the central bank's firepower.

With the sanctions freezing a number of Russian entities out of bond and syndicated loan markets, pressure is growing on accessing FX liquidity, albeit analysts believe near-term refinancing risks are moderate.

Russian entities have USD20.39bn-equivalent of foreign bonds due in 2015 and USD13.03bn in 2016, according to Thomson Reuters data. The majority of that debt is in US dollars.

"I do not see much difficulty in refinancing debt [up to] 2016," said Alexey Kudrin, who served as Russia's finance minister for 11 years until 2011, and as deputy prime minister between 2000-2004 and again in 2007.

But international bond obligations leap to USD27.17bn-equivalent in 2017.

"You do start to worry," said one capital markets banker. "If state-owned banks can't provide dollars to the corporate sector, there is a cycle of doom and gloom."

The problem for Russia has become acute, as low oil prices and a tumbling rouble threaten to take their toll.

State-owned lenders such as Sberbank and VEB have been sanctioned by both the US and EU, preventing them from raising debt of longer than 90 days from Western banks. This has put a strain on the dollar liquidity of Russian banks.

But for now, any pain could be limited to the SME sector, which typically is not active in the bond or syndicated loan markets.

"If sanctions continue into next year it will be difficult for small and mid-sized corporates," Kudrin said, adding that the automotive industry looks particularly liable to default as it relies so much on imported goods paid for with dollars.

Foreign direct investment into Russia is also expected to fall by 20% next year or possibly more, Kudrin said.

Sberbank and fellow sanctioned firm Gazprombank announced in September and October, respectively, that they are considering raising foreign currency funding on the domestic market. VTB declined to comment on whether it was considering a similar move when contacted by IFR.

While domestic foreign currency bonds will in effect amount to Russian banks shifting dollar debt between themselves, it will still play an important role, with banks facing dollar shortages able to call on banks with surpluses, according to a banker at a Russian lender.

And there are Russian banks with an excess of dollars, despite the international capital markets being shut, according to one analyst.

"The local banking sector kept an increasingly high dollar position in the last couple of weeks because the market may dry out," said the analyst at a European bank. "This is unsustainable."


Extensive Reserves
Should sanctions stretch out further than 2016 - an unlikely but possible outcome according to Moody's (MCO) - then the Russian central bank still holds formidable reserves.

The institution had USD409bn of foreign exchange reserves at the end of September, though this is down from USD457bn at the beginning of the year, according to its website.

"We believe USD50bn could be provided to the leading organisations [through repoing with the central bank]," said Sergey Shvetsov, first deputy chairman of the central bank of Russia, speaking on a panel at a Moscow Exchange event.

Shvetsov called the idea that Russia's central bank is simply providing dollars for Russian banks to lend to each other "an oversimplification."

The plunging oil price has compounded the effects of sanctions on Russia. Brent crude was trading at USD86.29 a barrel on Wednesday, well below Russia's breakeven price - estimated by Deutsche Bank to be around USD100.

"The whole situation in Russia started before the Ukraine crisis. They are pretty much dependent on oil prices which are set in international markets," said a bank analyst.

But the price of oil is something Russia is going to have to get used to, according to Kudrin.

"I see an oil price of USD80-85 for the next five years or so," he said.

(By Michael Turner, Reporting By Michael Turner, editing by Sudip Roy, Julian Baker)