Tuesday, January 20, 2015

Could Russia default if oil falls to $ 25 ?


Could Russia default if oil falls to $ 25 ?


Photo: iStockPhoto20.01.2015, 20:30 | Peter Orehin

Russia has reduced the national debt by a third in the past year, the central bank said today. Now he is about $ 52 billion, or about 5% of GDP. But the international rating agencies are preparing together to lower Russia's sovereign rating to "junk" level. This means that they are above the estimated probability of default on Russian debt."Times" versed in how can there be a default in the short term.

In January of this year, just two rating agencies of the "Big Three" - Fitch and Moody's - downgraded Russia's sovereign rating to "predmusornogo" level. Until the end of January, S & Palso should make your decision. And if the agency downgraded the rating, it will go into the speculative zone. Ratings are intended to provide guidance to investors and primarily reflect the probability of default on debt securities of the issuer.

However, the assessment of external debt, which is published today, the Central Bank does not give reasons for pessimism regarding the government's ability to service its debt. Here in the banking and corporate sectors can cause problems, analysts say. 


Russia's foreign debt at January 1, 2015 was $ 599.497 billion, a decline for the year to $ 129.4 billion, or 17.8%. In the fourth quarter of last year, domestic borrowers paid nearly $ 80 billion. The state debt (including obligations of the Central Bank) dropped even more - by 33.2%, to $ 51.9 billion. Of this amount, governments have to $ 41.516 billion for the Central Bank - $ 10.407 billion.

Based on the current dollar exchange rate of 65 rubles.and GDP in 2014 about 70 trillion rubles., the aggregate amount of external debt amounted to 1 January 2015, about 60% of GDP. The state should at least 5% of GDP.

Can the government to pay interest on this debt? Certainly. Analysts agree with the opinion of the ex-Finance Minister Alexei Kudrin, who believes that a default is not possible, since the resources to pay the government more than enough.

Foreign exchange reserves of the Central Bank, despite a marked reduction in the last year amounted to January 1, 2015 $ 385.46 billion. This amount covers, and the national debt, and annual imports ($ 308 billion in 2014, according to preliminary estimates of the Central Bank), while considered acceptable period of three months.

"Russia has substantial reserves, which fully cover the sovereign debt. The key question, whether the Government will continue to pursue a policy of the Central Bank and conservation reserves. While the rhetoric of the officials said that the Bank of Russia and the government against spending accumulated funds to support the national currency. Under these conditions, talk about the prospects of sovereign default within 2015 is hardly worth "- believes the head of" Analysis of the debt markets "analytical department of PSB Igor Golubev.

Another important point - despite the drop in oil prices, Russia maintains a positive trade and balance of payments. Current account surplus in 2014 reached $ 56.7 billion in the fourth quarter (ie even at oil prices around $ 60 per barrel) was plus $ 10.5 billion. The trade balance at the end of 2014 drawn up with a surplus of $ 185, 6 billion in the fourth quarter - $ 37.5 billion. The decrease of imports ahead of the fall in exports and allows you to save a positive foreign trade balance. This statistic means that the country continues to flow currency in large enough quantities.

With the price of oil at $ 50 a barrel, analysts believe that the current account and trade balance will remain positive.

"Overall, 2014 showed the flexibility of the external balance and the ability of Russia to achieve a positive balance of emergency" - analysts said Sberbank CIB. Analyst of "Alfa Capital" Andrew Schenck also says that "the current account surplus will remain, even though the decline in oil prices, as the decline in export earnings is offset by a decrease in the volume of imports, hence currency will be sufficient to repay the external liabilities."

Fiscal policy remains one of the problem areas, but there are reserves.

According to the Russian Finance Minister Anton Siluanova, the budget may be short of this year at current oil prices 3 trillion rubles. At the same time in the reserve fund in December of last year, according to the Ministry of Finance, was 4.4 trillion rubles. For the current year the agency is allowed to use only 500 billion rubles., But it is clear that the deterioration of the situation this boundary can be at any time to review.

For comparison, the Ukraine, the rating which is in the speculative zone and liabilities which analysts expect default this year (in particular, if Russia would require early repayment of $ 3 billion, issued by the government of Viktor Yanukovych in late 2013), has foreign exchange reserves of $ 7, 5 billion. That's enough for five weeks of imports. According to the officials and experts, the country need to pay this year's $ 11 billion. And you have to pay for imported gas, coal and electricity. Ukraine's GDP in the last year will drop by at least 5% (outcomes so far), the inflation rate was 25%. This year the situation better not be.

The Ukrainian government is negotiating with the IMF on a new loan tranche. The Foundation's mission in Kiev January 12 and is expected to leave the Ukrainian capital on January 29. International donors are not satisfied with the extremely slow pace of reform in Ukraine, so the decision yet. "I date (receipt tranche from the IMF) can not call because we really in a very difficult negotiation. 

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Ukraine's public debt, according to Moody's, was 72.4% in 2014. Against this background, Russia's problems seem to be serious. Nevertheless, Russia's ratings are also close to speculative grade. Arguments for their reduction is not directly related to the amount of debt and the parameters of public finances.

Decisions of the Agency shall take the following reasons: the fall in oil prices, depreciation of the ruble, raising the key rate of the Central Bank to 17%, sanctions, capital flight ($ 151 billion last year), the expectation of a recession (agencies and international financial institutions - the IMF, World Bank EBRD - waiting for the fall of the Russian GDP to 3-5.5% in 2015), the reduction of budget revenues, high inflation (11.4% in 2014 and 10-15% of it), as well as the policy of the Central Bank to regulate the financial market (for example, the introduction of exchange controls will lead to an inevitable decline in ratings).
"The sharp drop in oil prices quickly consolidated view of all agencies on the key risks of the Russian Federation, with the result that all its ratings were at the lower end of the investment category," - says Alexander Kudrin of Sberbank CIB.

It is characteristic that, for example, Moody's notes that the Russian government's ability to maintain financial system remain wide. Important factor here is the low level of debt and the "prudent fiscal policy." Even with the significant weakening of the external reserves of the country's liquidity ratio remains very strong, recognize Moody's.

However, analysts do not rule out the development of events on the negative scenario, which is based on an even stronger decline in oil prices. "Russia's default on foreign debt in the coming years is almost impossible. Financial reasons for not default "- sums up the Head of Market Research IFD" Kapital "Konstantin Gulyaev. "Unless, of course, Russia itself does not impose a moratorium on its payments," - he adds.

"Of course, of no small importance is the situation in the oil market. If oil prices fell below $ 25 a barrel, that is the average cost of oil production in Russia, the probability of default increases, "- says Igor Golubev of PSB.

Although it considers such a scenario is not very likely. "However, once again the value of the reserves is quite weighty, and achieving such levels in oil prices is highly unlikely. Another important point, of course, is the geopolitical situation. Imposition of new sanctions, limitation of international payments, in theory, can cause technical default. But it is unlikely the Western countries are ready to go for it, "- he said.

In this case all analysts believe that problems may arise in the corporate sector, and do not exclude defaults there.

"It is worth saying a greater probability of growth of defaults on the part of the corporate segment. Stagnation housekeeper, weakening of the ruble, the rising cost of credit on the back of higher key rate say that in 2015 we can see a series of defaults on the part of the corporate segment, especially in industries with low marginality, "- says Igor Golubev. However, Andrew Schenck believes that the state does not leave in the lurch key players in strategic industries.

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