— “The Financial World According to Inya” Column,
by Inya Ivkovic, MA
When conglomerate Dubai World announced last month that it needed temporarily to freeze the servicing of its debt of about 26.0 million dollars, the world braced itself for another domino effect kind of disaster, like Lehman Brothers was. Mercifully, this did not happen. But cracks in the global recovery veneer already started appearing, potentially threatening not only to stall it, but also to cut it dangerously short.
It turned out that Russian companies are up to their eyeballs in debt, as borrowing overseas has shot up since April this year. Westerners have lent Russia billions and billions of dollars with no regard for default risk just because Russia dogged the worst of the credit crisis in early 2009, when the rest of the world was still fighting the deepest recession in a generation. Additionally, temperate currency and commodity markets have further staved off the debt disaster since June. But Russia’s debt problem has not been solved, only postponed, as we have realized recently.
What bankers are now saying, belatedly, is that the Russian government needs to restructure its overleveraged companies completely. If the overhaul of Russia’s risk matrix does not happen along with restructuring, Russia also risks hampering its ability to borrow in the future.
Here are some statistics. Russia’s foreign corporate debt increased from $420.7 billion in April to $441.2 billion in October. If this does not seem like much of an increase, remember that the idea is to reduce debt, not to perpetuate it, particularly not in the current environment. Obviously, Russian companies, like many other before them, have found it difficult to resist tumbling interest rates and the more valuable ruble versus the dollar.
Current forecasts of Russia’s non-government debt expect to see the debt load increase to $500 billion in 2010. The argument supporting these forecasts is the fact that Russia plans to return to the debt market by issuing a sovereign Eurobond, which is to be used as a benchmark for setting interest rates for Russian borrowers. Russia’s central bank showed that $153 billion of that bond would be repayable by the country’s corporations and banks by the end of next year.
Mind you, Russian corporations have not been the designers of their own demise all by themselves. The appetite for Russian debt on the part of foreign lenders has been quite insatiable during the past few months.
Currently, Russia’s debt situation is at a standstill. Only two corporations, (yes, two only!), have successfully restructured their debt. Aluminum producer UC Rusal’s $7.4-billion deal and steel and coking coal producer Mechel’s $2.6-billion deal, are exemplary exceptions to the rule. The rest of the elephant in the room is still hovering, threatening to bankrupt the entire country, much like what happened to Iceland and Greece.
What is needed, sooner rather than later, is not only more debt negotiations, but also a set of legal principles and global best practices and guidelines that would take into account unique banking landscapes both in Russia and among Western banks. There is already a nickname for this proposed solution, “Moscow Rules,” although the nickname is hardly original. The predecessor rules or principles were the “London Rules” or “Insolvency Principles,” which were approved by the World Bank, Bank of England and British Bankers Association.
I don’t know if changing the rule book is even possible in that corner of the world, let alone doable. But what I do know is that, whenever debt horror stories like Dubai World and Russia’ debt load hit the surface, our shaky recovery plunges the same distance in the opposite direction.
I suppose it creates a lesser impact when a country such as Greece “files” for bankruptcy. But when a country such as Russia finally realizes it is sitting on a debt bomb, we have to wonder what will happen with its tentacles on our end. Bad decisions partly made half a world away to overextend, coupled with even worse decisions much closer to home to lend indiscriminately, will have a long term impact on all of us, whether we like it or not.