The $42 Billion Debt Trap That Putin Has Three Years to Escape
2015-07-20 07:11:06.260 GMT
(To be sent Russia Credit columns, click here. For more
credit-market news, TOP CM.)
By Anna Andrianova and Vladimir Kuznetsov
(Bloomberg) -- For the state of Russia’s finances, consider
places like Chukotka, the territory separated from Alaska by a
narrow strait.
The government there has racked up debt equal to 144
percent of its revenue, the highest in Russia, according to
Standard & Poor’s. Regions from Belgorod near Ukraine to three
North Caucasus republics are also prompting concern with ratios
topping 100 percent. The premium investors demand to hold
Russian municipal bonds over sovereign securities is the highest
in more than a month and 103 basis points more than last year’s
average, according to UralSib Capital data.
The clock is ticking for President Vladimir Putin to defuse
a situation he set off in 2012 with decrees to raise social
spending. That contributed to a doubling in the debt load of
Russia’s more than 80 regions to 2.4 trillion rubles ($42
billion) in the past five years. Strains on their finances will
grow critical in two or three years, raising the risk of
bailouts from a federal budget already running a deficit for the
first time since 2010, according to S&P.
“A default by a large region could block market access for
the Finance Ministry itself,” said Karen Vartapetov, associate
director of S&P’s Moscow office. “Right now the federal center
has an opportunity to help regions. In three years, there may be
fewer resources, while regional debt may be bigger, and that
will result in greater risks.”
The Finance Ministry in Moscow didn’t reply to a request
for comment on the risks facing regional governments.
Yawning Gap
Threats to municipal finances are snowballing as sanctions
over Ukraine choke access to capital markets, forcing local
governments to fund social outlays with costlier bank loans.
While regional debt sales are down 53 percent so far this
year, Moody’s Investors Service estimates borrowing will grow as
much as 25 percent in 2015, driven by spending on health care,
education and utilities.
The squeeze is putting regions in jeopardy. They’re facing
“an increasing likelihood of defaults,” S&P warned in June. At
least one non-rated local government delayed a principal
repayment on a bank loan in the first quarter, it said.
Local administrations are running a 625 billion-ruble
deficit, up 42 percent from 2014, according to S&P. Seventy-five
regions had a budget gap last year, the Higher School of
Economics in Moscow said in a May report.
Refinancing Issues
Belgorod, a region of 1.5 million people, is one of only
five municipal borrowers this year, placing 5.3 billion rubles
of sinkable five-year notes this month at a coupon of 12.65
percent. That compares with a 8.3 percent coupon on seven-year
bonds sold in 2013. The yield on Belgorod’s notes due June 2020
has risen eight basis points to 13.26 percent since trading
began July 8.
The authorities in Moscow want to ease the crisis by
helping regions replace bonds and commercial loans with
subsidized loans from the federal budget, offered at a 0.1
percent annual rate. Russia will allocate 310 billion rubles to
this in 2015, according to Prime Minister Dmitry Medvedev, who’s
backed converting some foreign-currency debt into rubles.
Even so, local governments continue to rely on commercial
loans, increasing bank debt by a quarter since the start of 2014
to 1 trillion rubles on March 1, central bank data show.
Risks of imbalances in regional budgets will probably grow
this year as the economy shrinks, the central bank said in June.
“Because of the high debt burden, access to market sources
of financing may be partly closed for some regions,” it said.
“In addition, these regions may have difficulties with
refinancing existing debt because banks are becoming more
selective in assessing regional risk.”
For Related News and Information:
Putin Takes Credit for Dodging ‘Deep Crisis’ as Slump Deepens
Moody’s Sees Russian Sanctions Entrenched in Blow to Rating
Russia Sanctions Show Bright Side as Companies Push to Cut Debt
Top Russia stories: TOP RUS <GO>
For Russian economic surveys: ECO RU <GO>
Russia country overview: COUN RU <GO>
Russian economic-data search: ECST RU <GO>
Economic data workbench: ECWB <GO>
--With assistance from Paul Abelsky in Prague.
To contact the reporters on this story:
Anna Andrianova in Moscow at +7-495-771-7738 or
aandrianova@bloomberg.net;
Vladimir Kuznetsov in Moscow at +7-499-271-3367 or
vkuznetsov2@bloomberg.net
To contact the editors responsible for this story:
Balazs Penz at +36-1-881-0227 or
bpenz@bloomberg.net;
Alex Nicholson at +7-495-771-7715 or
anicholson6@bloomberg.net
Paul Abelsky, Andrew Langley
2015-07-20 07:11:06.260 GMT
(To be sent Russia Credit columns, click here. For more
credit-market news, TOP CM.)
By Anna Andrianova and Vladimir Kuznetsov
(Bloomberg) -- For the state of Russia’s finances, consider
places like Chukotka, the territory separated from Alaska by a
narrow strait.
The government there has racked up debt equal to 144
percent of its revenue, the highest in Russia, according to
Standard & Poor’s. Regions from Belgorod near Ukraine to three
North Caucasus republics are also prompting concern with ratios
topping 100 percent. The premium investors demand to hold
Russian municipal bonds over sovereign securities is the highest
in more than a month and 103 basis points more than last year’s
average, according to UralSib Capital data.
The clock is ticking for President Vladimir Putin to defuse
a situation he set off in 2012 with decrees to raise social
spending. That contributed to a doubling in the debt load of
Russia’s more than 80 regions to 2.4 trillion rubles ($42
billion) in the past five years. Strains on their finances will
grow critical in two or three years, raising the risk of
bailouts from a federal budget already running a deficit for the
first time since 2010, according to S&P.
“A default by a large region could block market access for
the Finance Ministry itself,” said Karen Vartapetov, associate
director of S&P’s Moscow office. “Right now the federal center
has an opportunity to help regions. In three years, there may be
fewer resources, while regional debt may be bigger, and that
will result in greater risks.”
The Finance Ministry in Moscow didn’t reply to a request
for comment on the risks facing regional governments.
Yawning Gap
Threats to municipal finances are snowballing as sanctions
over Ukraine choke access to capital markets, forcing local
governments to fund social outlays with costlier bank loans.
While regional debt sales are down 53 percent so far this
year, Moody’s Investors Service estimates borrowing will grow as
much as 25 percent in 2015, driven by spending on health care,
education and utilities.
The squeeze is putting regions in jeopardy. They’re facing
“an increasing likelihood of defaults,” S&P warned in June. At
least one non-rated local government delayed a principal
repayment on a bank loan in the first quarter, it said.
Local administrations are running a 625 billion-ruble
deficit, up 42 percent from 2014, according to S&P. Seventy-five
regions had a budget gap last year, the Higher School of
Economics in Moscow said in a May report.
Refinancing Issues
Belgorod, a region of 1.5 million people, is one of only
five municipal borrowers this year, placing 5.3 billion rubles
of sinkable five-year notes this month at a coupon of 12.65
percent. That compares with a 8.3 percent coupon on seven-year
bonds sold in 2013. The yield on Belgorod’s notes due June 2020
has risen eight basis points to 13.26 percent since trading
began July 8.
The authorities in Moscow want to ease the crisis by
helping regions replace bonds and commercial loans with
subsidized loans from the federal budget, offered at a 0.1
percent annual rate. Russia will allocate 310 billion rubles to
this in 2015, according to Prime Minister Dmitry Medvedev, who’s
backed converting some foreign-currency debt into rubles.
Even so, local governments continue to rely on commercial
loans, increasing bank debt by a quarter since the start of 2014
to 1 trillion rubles on March 1, central bank data show.
Risks of imbalances in regional budgets will probably grow
this year as the economy shrinks, the central bank said in June.
“Because of the high debt burden, access to market sources
of financing may be partly closed for some regions,” it said.
“In addition, these regions may have difficulties with
refinancing existing debt because banks are becoming more
selective in assessing regional risk.”
For Related News and Information:
Putin Takes Credit for Dodging ‘Deep Crisis’ as Slump Deepens
Moody’s Sees Russian Sanctions Entrenched in Blow to Rating
Russia Sanctions Show Bright Side as Companies Push to Cut Debt
Top Russia stories: TOP RUS <GO>
For Russian economic surveys: ECO RU <GO>
Russia country overview: COUN RU <GO>
Russian economic-data search: ECST RU <GO>
Economic data workbench: ECWB <GO>
--With assistance from Paul Abelsky in Prague.
To contact the reporters on this story:
Anna Andrianova in Moscow at +7-495-771-7738 or
aandrianova@bloomberg.net;
Vladimir Kuznetsov in Moscow at +7-499-271-3367 or
vkuznetsov2@bloomberg.net
To contact the editors responsible for this story:
Balazs Penz at +36-1-881-0227 or
bpenz@bloomberg.net;
Alex Nicholson at +7-495-771-7715 or
anicholson6@bloomberg.net
Paul Abelsky, Andrew Langley