Category Archives: Russian debt redemptions

10/2/16: "Чем хуже, тем лучше"

My latest column “Чем хуже, тем лучше. Откуда у российской экономики все больше сил“ for is out at 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.

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: 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:

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: 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.

17/1/2015: Russian Capital Flight: What Western ‘Analysts’ Forget

Central Bank of Russia released full-year 2014 capital outflows figures, prompting cheerful chatter from the US officials and academics gleefully loading the demise of the Russian economy. 

The figures are ugly: official net outflows of capital stood at USD151.5 billion - roughly 2.5 times the rate of outflows in 2013 - USD61 billion. Q1 outflows were USD48.2 billion, Q2 outflows declined to USD22.4 billion, Q3 2014 outflows netted USD 7.7 billion and Q4 2014 outflows rose to USD72.9 billion. Thus, Q4 2014 outflows - on the face of it - were larger than full-year 2013 outflows.

There are, however, few caveats to these figures that Western analysts of the Russian economy tend to ignore. These are:
  • USD 19.8 billion of outflows in Q4 2014 were down to new liquidity supply measures by the CB of Russia which extended new currency credit lines to Russian banks. In other words, these are loans. One can assume the banks will default on these, or one can assume that they will repay these loans. In the former case, outflows will not be reversible, in the latter case they will be.
  • In Q1-Q3 2014 net outflows of capital that were accounted for by the banks repayment of foreign funding lines (remember the sanctions on banks came in Q2-Q3 2014) amounted to USD16.1 billion. You can call this outflow of funds or you can call it paying down debt. The former sounds ominous, the latter sounds less so - repaying debts improves balance sheets. But, hey, it would't be so apocalyptic, thus. We do not have aggregated data on this for Q4 2014 yet, but on monthly basis, same outflows for the banking sector amounted to at least USD11.8 billion. So that's USD 27.9 billion in forced banks deleveraging in 2014. Again, may be that is bad, or may be it is good. Or may be it is simply more nuanced than screaming headline numbers suggest.
  • Deleveraging - debt repayments - in non-banking sector was even bigger. In Q4 2014 alone planned debt redemptions amounted to USD 34.8 billion. Beyond that, we have no idea is there were forced (or unplanned) redemptions.

So in Q3-Q4 2014 alone, banks redemptions were scheduled to run at USD45.321 billion and corporate sector redemptions were scheduled at USD72.684 billion. In simple terms, then, USD 118 billion or 78 percent of the catastrophic capital flight out of Russia in 2014 was down to debt redemptions in banking and corporate sectors. Not 'investors fleeing' or depositors 'taking a run', but partially forced debt repayments. 

Let's put this into a slightly different perspective. Whatever your view of the European and US policies during the Global Financial Crisis and the subsequent Great Recession might be, one corner stone of all such policies was banks' deleveraging - aka 'pay down of debt'. Russia did not adopt such a policy on its own, but was forced to do so by the sanctions that shut off Russian banks and companies (including those not directly listed in the sanctions) from the Western credit markets. But if you think the above process is a catastrophe for the Russian economy induced by Kremlin, you really should be asking yourself a question or two about the US and European deleveraging policies at home.

And after you do, give another thought to the remaining USD 33 billion of outflows. These include dollarisation of Russian households' accounts (conversion of rubles into dollars and other currencies), the forex effects of holding currencies other than US dollars, the valuations changes on gold reserves etc.

As some might say, look at Greece… Yes, things are ugly in Russia. Yes, deleveraging is forced, and painful. Yes, capital outflows are massive. But, a bit of silver lining there: most of the capital flight that Western analysts decry goes to improve Russian balancesheets and reduce Russian external debt. That can't be too bad, right? Because if it was so bad, then... Greece, Cyprus, Spain, Italy, Ireland, Portugal, France, and so on... spring to mind with their 'deleveraging' drives...