LONDON/MOSCOW: Russia has a little more than a year of breathing space if western sanctions stop it from selling new sovereign debt, and then the strain on state finances would start to bite, investors say.
The European Union is considering barring investors from buying new Russian sovereign debt and speculation is mounting that the United States may make a similar move, in retaliation for Moscow’s role in the Ukraine conflict.
Russia has considerable reserves to draw on — currently around $469bn in gold and foreign exchange — and no immediate need to tap the markets for new capital. Many argue the measure would be more symbolic than punitive.
However, the country’s dependence on increasingly unstable oil and gas revenue and commitments by Moscow to provide finance to sanctioned companies prevented from raising money abroad could see it backed into a corner.
“It’s quite difficult to tell how long they have, I’d put it at more than one year. But it’s not static,” said Viktor Szabo, a portfolio manager at Aberdeen Asset Management.
The strain on those reserves is growing, Szabo said. Economic growth is ebbing fast, with gross domestic product expected to grow by 0.3 percent at most this year and energy export revenues are falling. A run on the currency would also shorten the time Russia can continue in isolation, Szabo said.
Ratings agency Moody’s said in a recent research note that further sanctions “would erode key credit strengths in the external and fiscal sphere.” One effect would be broader risk aversion towards Russian assets, the agency said. That would lead to capital flight and in turn put further strain on the country’s foreign exchange reserves.
“And let’s not forget... the state-owned companies have now started to ask for recapitalisation. If it’s in hard currency, it has to come out of reserves. And we’re talking about pretty chunky demands. It’s not a couple of billion dollars, it’s tens of billions of dollars,” Szabo added.
Russia’s central bank has pledged to support domestic banks hurt by the last round of sanctions, such as the country’s second-largest lender, VTB. The head of oil producer Rosneft has also sought 1.5 trillion rubles from the government to support it against sanctions.
Even Russian companies not directly affected by sanctions have found raising money in western capital markets harder since the Ukraine conflict escalated and spooked many investors.
A particular headache is the falling price of oil. Oil and gas account for around two-thirds of Russia’s exports and close to half its federal budget revenues. Over the course of a year, each $1 fall in the oil price wipes around $1.4bn off federal tax revenues.
The state budget is based on an oil price of $104 for 2015, and Deputy Finance Minister Alexei Moiseev has warned recently those projections may be optimistic, with prices below $100 now a possibility.
Craig Botham, an economist at UK fund manager Schroders, also calculates Russia’s foreign exchange reserves would take little more than one year to be depleted.
Reuters
