15.09.2008 - MDM Comment: Russia doing more to insulate itself from global liquidity, credit crisis

A number of Russia's high-profile government officials, including President Dmitry Medvedev, have made upbeat statements today in an attempt to assuage the negative sentiment currently pervading local financial market. Among other things, Mr. Medvedev said that he had instructed the government to provide more liquidity for the financial system. Simultaneously, Alexey Kudrin, the minister of finance, explained that the amount available for banks at Treasury cash auctions has now been increased from RUB670 bn to RUB1.2 trn (almost USD50 bn).

 

We continue to believe that the Central Bank of Russia (CBR) and the government have both WILLINGNESS and ABILITY to avoid any major distress in the local financial system, and that any bank of material size (top-50 for sure) will be supported in one way or another. By buttressing financial institutions, regulators are preparing the ground to avoid a hard landing for the economy, and particularly its more leveraged segments. 

 

The banks now have access to almost RUB2 trillion of “extra-cash”, which includes deposits from the Treasury and the state-owned “development institutions”, as well as repo funding at the CBR. Further measures of support could include a reduction in the CBR's reserve requirements and key interest rates, particularly once we see first signs of inflation subsiding, which we believe should happen.

 

While we acknowledge that life for Russian banks and corporates will not be easy in coming months, we remain confident that a local systemic credit crunch will be avoided. Net external debt repayments, together with liquidations of local bond and equity holdings by foreigners, cannot be large enough to challenge Russia's FX reserves and trade surplus. We effectively mean that if Russian borrowers fail to refinance their foreign currency debt abroad, they will borrow in RUB with the help of state funds, while exporters and/or the Central Bank will sell them dollars.

 

Just to throw in some numbers as we are working on a more accurate analysis. Russia’s consolidated external debt due in the next 12 months is less than USD 100 bn according to official statistics, and that figure is polluted with many things one should take out. For instance, with liabilities of various Russia-registered subsidiaries of foreign banks and corporates. Don’t forget, that a quarter of consolidated equity of Russian banks is already owned by foreigners. On the other hand, Russia’s annual trade surplus is around the same USD 100bn, while FX reserves total 580 bn. Local companies and banks have raised USD 67 billion in foreign currency borrowings this year alone, i.e. they are definitely not cut from funding completely. Some numbers still need to be estimated (how much of on-shore equity and bond holdings of foreigners are still not liquidated) but we believe they won’t materially change the bottom line. We hope this is a useful color for the readers of today’s publication in FT (“Russia in struggle to refinance debt”), where the USD 45bn figure is somewhat taken out of context.

 

The ruble is stable today, with the basket (30.37) trading slightly below the new upper boundary of the Central Bank's corridor (30.40). Meantime, the RTS equity index is down almost 4%.