Russian companies face credit crunch danger

Russia’s companies face a looming credit crunch unless sanctions imposed by the west are relaxed and access to international capital markets is regained, according to Moody’s, the ratings agency.

Debt issuance by Russian companies in global capital markets has dried up since July, when the EU and US tightened retaliatory measures following the shooting down of Malaysia Airlines flight MH 17 over eastern Ukraine. Without access, Russian companies will be unable to refinance maturing debts with international investors.

Analysts said the crunch would hit in 2016 and the metals and mining, real estate and construction sectors could suffer most.

“Most [Russian] companies have sufficient liquidity to enable them to meet their 2015 debt maturities. But when you move into 2016 and 2017, the numbers start to become a concern if companies don’t have access to the international debt capital markets,” said David Staples, Moody’s managing director with responsibility for emerging market companies.

According to Russia’s central bank, Russian banks and corporates have to repay $134bn in external debt between now and the end of 2015. In December alone, a whopping $32bn comes due for redemption, partly driven by the need for Rosneft, the state oil company, to repay foreign loans it took out to finance its acquisition of TNK-BP in March last year.

Analysts warn this spike in redemptions will further fuel capital outflows, which already jumped to $74bn in the first six months of the year.

“Net capital outflow will grow quite significantly in the second half both year-on-year and compared to the first six months,” said Vladimir Tikhomirov, chief economist of BCS Prime. He said repayments of external debt and the Russian companies’ retention of export earnings in accounts outside the country had become the most important driver of Russia’s growing capital outflows.

Rosneft and Gazprom have each secured multiyear export contracts with China with huge prepayment commitments, and the government has promised financial support for sanctioned entities, so analysts do not expect them to run into trouble repaying foreign debt.

But smaller private companies are expected to suffer much more from the capital market sanctions. “As they tend to be much more leveraged, we expect smaller corporates to begin to struggle eventually, but this will take four or five quarters to be felt,” said Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow. “Corporate non-performing loan ratios will start creeping up towards the end of 2015.”

However, government officials and economists in Russia argue that the real redemption pressure for now is much lower than suggested by the central bank’s cross-border figures because these include the quasi-equity of Russian offshore holding companies in their onshore businesses.

“There is a very frequent phenomenon where an offshore holding company provides capital, which is in essence equity capital, in the form of debt,” said Vladimir Kolychev, chief economist of VTB Capital, the investment banking arm of Russia’s second-largest bank. “This is done because it’s more convenient to expatriate profits in the form of interest payments – interest payments reduce your tax base locally and these equity injections protect in the case of medium and small companies from raid attacks.”

Central bank statistics show that of $220bn in loans disbursed to non-banking corporates and households in Russia last year, almost $93bn came from jurisdictions that are home to large numbers of Russian offshore holdings but are not typical sources for large amounts of bank lending, including Cyprus, Ireland, Luxembourg and the British Virgin Islands.

“If you look through all eurobonds, syndicated loans and bilateral loan agreements, you arrive at a number which is roughly half of the central bank one,” said Mr Kolychev. “We believe there are about $70bn in redemptions coming through until the end of next year, with Rosneft and [state gas company] Gazprom accounting for about half of that.”